Taking on a home equity line of credit requires you to take money out of your home. For some people, this can be a lucrative way to get money that they need, despite the negative annotations that follow this type of loan. Taking out a HELOC (Home Equity Line of Credit) is a flexible way to get the money that you need, giving you flexibility regarding payment terms and even on how much money you actually use from the line of credit. If you are wondering whether or not a HELOC is right for you, here are five reasons to consider it.
Flexibility with the Amount you Withdraw
When you take out a second mortgage, you are provided the entire amount of money up front. For example, if you have $100,000 available in equity in your home and take out that entire amount in a standard home equity loan, you will have to make payments on the full $100,000. If you took $100,000 in a home equity line of credit, however, you only make payments on the money you withdraw. It works in the same fashion that a credit card does – you use what you need and make minimum payments on that amount. In this example, let’s say you took the line of credit out to make home repairs that totaled $50,000. You could draw the $50,000 from your line, leaving the other $50,000 untouched. This means that you are able to make payments strictly on the $50,000, giving you lower payments.
Paying off other Debt
Revolving credit card debt can seem like the bane of your existence. Just when you think you are getting caught up, the fees and interest make you feel like you are digging a deeper hole yet again. If you are diligent about your desire to pay this debt off, a home equity line of credit is a great way to do it. You have to be determined to pay the debt off, however. This means taking out an HELOC for the amount of your credit card debt and having the debt paid off in full at the closing of the loan. Once the cards are paid off, you have to either close the accounts or trust yourself to be responsible enough not to use them again or you put yourself in the same vicious cycle. People that take out the HELOC and pay off their debt the right way, however, are able to take advantage of low-interest rates and one payment that you can make every month, cutting out the stress and large amounts of interest that multiple bills can create.
Paying for College with a HELOC
Paying for college has become an impossible task for many people because of the rising expenses. While student loans could be a viable option for some, the ensuing payments that begin after the degree had been achieved can be overwhelming, not to mention expensive. When you tap into your home equity, you control how much money you take out and use and you get to take advantage of the lower interest rates. In addition, having an HELOC at your disposal enables you to have money available for each new semester that comes up, which usually means more fees and more student loans. Rather than taking out more loans that will just continue to bury you, the HELOC enables you to keep a handle on what you spend, how much your payments will be, and how many servicers you need to pay.
Making Home Improvements
Home improvements are perhaps, the most important use of home equity funds. This is because the money you take out gets reinvested directly in the home. Of course, it depends on the types of changes you are making – if the changes do not affect the value of your home in any way, you are not going to make your money back. If, however, you are making changes, such as upgrading a kitchen or bathroom or replacing the roof, you are directly impacting the value of the home, which means you will see a return on your investment. You will still have to pay the interest charges that come about as a result of taking money out of your home, but when you sell the home, you will reap most of the money back that you borrowed, making home improvements are a large reason to use an HELOC.
The Interest Rates are in Control
Interest rates are one of the largest downfalls of credit cards. Sure, you can probably get the money you need for a project, emergency fund, vacation, or any other reason, but it will come at a high price if you use credit cards. Considering the difference between a 20% interest rate and a 4% interest rate, it is fairly easy to see why a home equity line of credit makes much more sense over a credit card. In addition to the low-interest rates, is the fact that when you sell the home, you pay off the HELOC instantly, eliminating that debt from your life. If you were to sell your home and have a large amount of credit card bills outstanding, however, you would not automatically pay off the debt. Most people end up leaving the debt as is and purchasing a new home, continuing the vicious cycle of debt.
There are many reasons to take out a home equity line of credit, but you must commit to being responsible with your money. It is important not to get overzealous with your spending just because you have the money available to you. Keep your wits about you and only use the money as is absolutely necessary and where it will provide you with ample benefits, such as saving on interest charges, keeping your payments to a minimum, and giving you a great return on your investment.