Home equity is the value of your home less the remaining outstanding mortgage balance. You may be worried about your current debts or wish you could buy new furniture or fix up your house, but you may already have the money you need.
With a home equity loan or equity line of credit, you can use the value of your home (less the balance owing) and consolidate debts or even remodel your home.
What is a loan or line of credit against your home's equity?
Unlike a typical loan which deposits a set amount of money in your account and begins charging you interest and payments at a fixed rate until repaid, an equity line of credit acts as a revolving credit (like your credit card) (like your credit card). Also, you don't have to pay interest on the whole amount you have access to; you only pay for the money you borrow. Like a credit card, when the debt is repaid you still have access to the credit.
Using an equity line of credit, which is also called a Home Equity Line of Credit or HELOC, gives you more options at the lowest cost. Not only can you access the credit only as you need it, but your monthly payments will reflect only the balanced used. The less used the lower your payment. Some lines of credit have only the interest as the minimum payment, which can be helpful when finances are tight.
What Can I Do With My Equity Loan or Line of Credit?
Even though you can probably use your line of credit for a lot of different things, here are some of the most common ones.
Consolidate Debts - Using your equity line of credit to consolidate other debts can not only eliminate the stress of multiple bills but can also give you a more favourable interest rate or tax benefit.
Second Mortgage: Pay off your first mortgage with your line of credit to get a better interest rate.
Remodel, vacation, new car, etc. - You can use your line of credit to do things like fix up your house, buy new furniture, a car, or go on vacation. You'd pay less in interest than if you used a credit card or store card, so it's a smart way to pay for big purchases.
Smart Ways to Use Your Equity Loan or Line of Credit
Before you give in to what seems like easy money, you should think about the extra risk.
Some debts, like student loans, come with benefits that you might lose if you switch them to an equity line of credit.
Other things like cars and vacations may seem like good ideas to buy with your home equity line of credit, but if you can only pay the interest, you may not be motivated to pay off the debt and end up owing for things that have lost their value or are used up. For the most benefit, plan to pay off the debt quickly.
Getting a second mortgage (or refinancing) could be a good idea or not, depending on the interest rates and how you plan to pay back the loan. Even though lines of credit take advantage of the low interest rates that are currently available, you may find that your regular loans protect you better from changing rates if you don't plan to pay off the loan in the next few years.
You can get out of debt and be financially free if you understand the risks and make good financial decisions.
