Need money for home improvements, medical bills or a child's tuition? A home equity line of credit may be the answer. Know what to look for and find the best deals.
A home equity line of credit is like using a credit card with your house as the collateral. The big difference? Interest rates are a lot lower with a line of credit, if you know what to look for:
- Shop around. Banks charge variable interest rates for home equity lines of credit, although some lending institutions may offer a low fixed "teaser" rate for a short period of time. Then at some point the interest rate jumps up, so read the fine print. Find out what your options are if interest rates suddenly spike or if they go down. How far will your rate go down? Is there a cap on how high your payment can rise? These are questions you need to ask before signing on the dotted line.
- Find out if your interest payment is tax deductible. Depending on your tax situation, you may be able to deduct the interest because your debt is secured by a home.
- Don’t use a home equity line of credit for frivolous expenses. Remember, if you don’t pay back this loan, you could lose your house. So a vacation or holiday gifts are not what you should use this money for. Medical expenses, home improvements and college tuition would make better choices.
- Pay more than the minimum. Some banks only charge interest and the principal is due when the loan comes due. Unless you are prepared for a whopping balloon payment, start to pay down the principal as soon as you can. In fact pay as much as you can, as soon as you can. Most banks don’t charge a pre-payment penalty.
- Ask about hidden fees. Before you commit to any bank, find out about closing costs, appraisal fees and any other charges associated with the loan.
- Is a second mortgage a better option? If you know exactly how much money you will need, a second mortgage may be the best alternative. Those interest rates are fixed so you know exactly what your payments will be every month and you can budget accordingly. But if you are not sure how much money you will spend…Say you are refinishing your kitchen and are worried about unexpected costs, a line of credit may be the answer. Then you can borrow money when you need it, instead of taking one lump sum. Or if you are worried about job security, a line of credit would be available when you need it. Once you are out of a job, banks are less likely to lend you money.
- Leave some equity left in your home. Your home is probably your biggest asset. Don’t take all the money out of it. Leave some equity. Especially if you plan on selling soon, or may be forced to sell. Remember, if you sell your home any outstanding loans are due at the time of closing.
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Source:US Federal Reserve Board
The copyright of the article Home Equity Line of Credit in Consumer Education is owned by L. Marie Dubuque. Permission to republish Home Equity Line of Credit in print or online must be granted by the author in writing.
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