Overview
A home equity line of credit isn’t exactly like a mortgage, however, as you have a set amount of time to borrow with it. The line of credit is made available to you, based on home ownership, and you’re able to withdraw from it. There’s a cutoff date, though, so make a plan first. There are also limits. Like a credit card, as you pay it off it’s available for use again, so you can continue to borrow within the window. Remember, it’s not a loan, it’s a line of credit. If you don’t use it, you don’t have anything to pay back.
Often, up to 85% of your home’s value is available as credit, and unlike loans, the APR is based on the interest rate, not financing charges. Keep in mind that how you can use a home equity line of credit is often limited, and you’ll want to discuss them with your financial organization before proceeding much further. There can also be upfront expenses, just like with a mortgage, so be sure to know what you’re getting into before signing anything.
Renovations are one of the most popular uses for a home equity line of credit. It can be a great use since you’re adding value to your home with the value of your home. A home equity line of credit can be better for this since you’re paying it off as you go, rather than funding it with one lump payment. That means you’ll end up taking a little longer but spreading the cost over time. It can also be used for personal reasons, such as starting a business or investing in your education, but you’ll want to be careful with less certain uses. Remember, your home is being used as collateral, so spend wisely. It's best not to tempt fate.
Keep in mind, also, that a variable interest rate could mean that your payments fluctuate, leaving you with unplanned expenses. As a result, your month-to-month budget could be thrown off in which you would have to make adjustments. Maybe include a little more than you think you'll need when doing calculations. Another thing to keep in mind is that these lines of credit can be tempting to use for things other than what you'd planned. Keep your willpower strong to avoid spending more than you want to, and keep close tabs on your home equity line of credit to make sure it stays manageable.
Benefits
If you’re careful, there are some significant benefits to a home equity line of credit. As long as your income is stable, and you can make the payments, the extra cash can make budgeting for projects much easier than if you have to take a chunk out of your monthly expenses. They can also be an easy way to cover a large, unexpected cost, such as a medical bill or college tuition. Just never forget that you’re borrowing against your home, so don’t go out and buy a new Porsche just because the cash is there.
As long as you’re cautious, and know what you’re getting into, a home equity line of credit could be the perfect solution to your next big project. Just don’t enter into anything without reading the fine print, and make sure it will be used for a worthwhile cause. The extra number crunching at the beginning can pay big dividends when it comes time to pay the bills, and you could end up adding value to your home if you responsibly utilize your line of credit.
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