If you need to borrow money, you may want to consider leveraging the equity in your home. Borrowing against equity can be used as a strategy to consolidate debt, pay for big ticket items, lower monthly expenditures or simply save on taxes. Popular lending tools, home equity lines of credit (HELOCs) have become commonplace in financial institutions across the country.
What Is an Equity Line?
Simply put, a home equity line is a credit card with a high limit that is secured by your house. A revolving account, a HELOC is able to be charged up to its designated spending limit, then paid off and used again. It is a second mortgage, however, and failure to pay can result in foreclosure. If you sell your home, the HELOC has to be paid off and closed, just like a regular mortgage.
Pros and Cons
HELOCs have several benefits. Because they are a mortgage product, interest paid on equity lines is often tax deductible. Since they usually have higher spending limits than traditional credit cards, HELOCs are popular options for consolidating debt, reducing high interest rates and lowering monthly payments.
HELOCs are not without fault, however. Interest rates are often variable and monthly payments can be high. Normally a percentage of your total balance, the minimum payments due on equity lines will increase along with your balance owed. In addition, lenders can raise interest rates at will, resulting in even higher monthly payments.
Fees
In most cases, there are fees associated with HELOCs. Initially, borrowers pay hefty closing costs in order to establish the accounts. Like traditional mortgages, closing costs can vary greatly and are usually rather expensive. Lenders also tack on charges such as annual fees, over-limit fees and late fees throughout the life of the accounts.
Interest Rates
Interest rates on equity lines are often variable. Based on several factors, rates can differ widely between lenders. Sometimes financial institutions offer special interest options such as fixed rates on charges over specific dollar amounts. Other options such as interest-only or balloon payments are also usually available.
Alternatives
Because HELOCs allow instant access to cash, frivolous and unhealthy spending habits can put borrowers at risk. Balances can add up quickly and must be continually monitored. As an alternative, however, home equity loans (HELOANs) offer a safeguard against unnecessary spending. Like lines of credit, HELOANs are second mortgages secured by your home and offer the same tax benefits. They can only be used once, however, and function more like a car loan. Users borrow an initial amount of money and make regular monthly payments until the loans are paid off. Once paid, the accounts are closed and unable to be reused.
If you are considering borrowing against the equity in your home, consider your options carefully. Equity lines of credit are great tools with many benefits, but can be dangerous if used improperly.
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