HOME EQUITY LINES OF CREDIT AND LOANS

If you are a homeowner, you may want to utilize the equity from your home as a source of financing for making large purchases or payments, i.e. home improvements, paying for college, eliminating debt, etc. Or, you may choose to refinance your mortgage to a lower interest rate and/or a longer term for the purpose of creating more monthly discretionary income for yourself.  Either way, your home's equity is a great resource for financing, particularly for larger purchases.

With a home equity line of credit, your lender establishes a credit limit that you are able to use as you need (up to your limit). You will either have a check book to use or a credit card.

Home equity loans are also known as second mortgages and enable you to borrow a fixed amount (usually 80% or less of the equity value in your home) which is to be repaid over a fixed term. Typically, interest rates are variable and associated and are based on the prime index. Monthly payments are also going to vary and will depend on the balance owed.

Being that mortgage rates are now at an all time low, now would be a great time to use your equity to pay off high interest credit card debt. Or, if your existing loan is several years old, it is very likely that you will be able to refinance and get a much lower rate.

Advantage of Home Equity Loans
Besides the fact that interest rates for these types of loans are typically significantly lower than unsecured personal loans (because you are securing the loan with your home), the interest rates are tax deductible.

Disadvantage
You are using your home as collateral for your loan. So, if you don't make the payments, you'll lose your home to foreclosure. Also, there may be some hefty closing costs and fees associated with your home equity loan. There are lenders that do not charge closing costs in attempts to win your business. Therefore it is important that you shop around for your loan.

Is a Home Equity Loan Your Best Option?
If you have any doubts that you will be able to pay your loan back, then a home equity loan is not right for you. Your loan is secured by your home and your lender will foreclose in the event that you default. According to USA Today, there were over 3 million foreclosures in 2008. In addition, nowadays you are going to need good credit in order to qualify for a home equity loan or refinancing. Do you know what your credit score is? Get a free copy of your credit scores.

Ultimately, your choice of whether or not to refinance is going to come down on how much money you will be saving (or not). If the rate you obtain is better than you current rate, your decision will be based on whether or not you plan on staying in your home long enough to make-up the cost incurred of refinancing. It is also a good idea to refinance to a mortgage with a lengthier term if you are looking to lower monthly payment commitments. However it is important to note that by increasing the term of your loan you will be increase the overall cost of your loan.

Winning at Refinancing
Pros and Cons of Lines of Credits

 




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