| An Equity Loan Could Reduce Your Monthly Bills |
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Home equity is the value of your home less the remaining outstanding mortgage
balance. While you may be worrying about currents debts or wishing you could
refurnish or remodel your home, you may be sitting on the cash 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 an Equity Loan or Equity Line of Credit?
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). In addition, you do not need to pay interest on the full amount you have
access to, you only pay for the money you have borrowed. Like a credit card,
when the debt is repaid you still have access to the credit.
Using an
equity line of credit (also known as a Home Equity Line of Credit or HELOC)
gives you greater flexibility with the least 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?
While you can probably find numerous uses for your line of credit, here
are samples of the more common reasons for obtaining an equity line of credit.
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 favorable interest rate or tax benefit.
Second Mortgage
- Use your line of credit to pay off the existing mortgage for better interest
rates.
Remodel, vacation, new car, etc. - You may use your line of
credit for renovating your home, buying new furniture, a car, or taking a
vacation. You would pay less interest payments than using a credit card or store
card making it a wise choice for large purchases.
Using Your Equity
Loan or Line of Credit Wisely
Before succumbing to what seems like
easy money, it is important to evaluate the additional risk.
Some debts,
as student loans have features that you may not be entitled to if you switch
them to an equity line of credit.
Other items like cars and vacations
may seem like a good idea to buy with your home equity line of credit, but with
the ability to pay only the interest you may find the motivation to pay off the
debt is lacking and end up owing for items that have lost their value or were
consumable. Plan to pay off the debt quickly for the most advantage.
Second mortgage (or refinancing) may or may not be a good idea depending
on interest rates and your repayment terms. While lines of credit take advantage
of current low interest rates you may find that your regular loans protect you
better from fluctuating rates if you will not be paying the loan down in the
next few years.
By understanding, the risks and making good financial
decisions you can get relief from debt and financial freedom. |
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