Home Equity Lines of Credit- Tapping Into Your Home's Value

Home Equity Lines of Credit: Tapping into Your Home's Value

A home equity line of credit (HELOC) is a popular way to lay your hands on some cash. Learn the pros and cons associated with this type of loan.

If you own a home, it can sometimes seem that keeping up with it is a never-ending drain on your bank account. But did you know that your home can also be a source of money? Your home is probably your greatest asset, and you can tap into it for cash, which can be used for such things as debt consolidation, home improvement projects and education costs. But when it comes to taking advantage of your home's value, many homeowners don't know the best path to take. One popular choice is a home equity line of credit (HELOC).

So what exactly is a home equity line of credit? It's basically a second mortgage that lets you turn your equity into cash. Remember, equity is the difference between how much your home is worth and how much you owe on the mortgage. For instance, if your home is worth $250,000 and you still owe $200,000 on the mortgage, you have $50,000 in equity. A HELOC uses your home as collateral, just like a primary mortgage and is usually repaid in a shorter time than a first mortgage. The common repayment time is 15 years, but some are as short as five years and others as long as 30 years.

A home equity line of credit works much like a credit card because it has a revolving balance. With a HELOC, you can borrow up to a certain amount for the life of the loan, which is set by the lender. During that time, you can withdraw money as you need it. Once you pay off the principal, you can use the credit again, much like a credit card.

So it all sounds great, right? A HELOC does have many advantages, but there are also some things you need to be cautious of:

• A home equity line of credit has a variable interest rate that will fluctuate over the life of the loan. That means payments will vary depending on the interest rate at the time.
• If the home is sold, you must pay off the HELOC balance.
• Each withdrawal could come with a fee, so be sure to find out if yours does.
• Just as with your primary mortgage, late payments or missed payments can put your home in jeopardy.
• It's tempting to use the money to live beyond your means, which will lead to problems down the road.

If you're considering a home equity line of credit, get the facts before making any decision. It can be a great way to tap into some extra money, but only if you use it responsibly.