Managing Home Equity Lines of Credit

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It’s easy to get carried away with your money, but it’s even easier to get carried away with things that you pay at a later date. Similarly to a credit card, homeowners can apply and use a home equity line of credit (HELOC) to pay off other expenses and then repay it at a later date by making monthly payments to their lender. A homeowner can use it to get those renovations they've always wanted to complete, to pay off their child’s college tuition and even use it when you’re in a sticky situation.

While HELOC has many obvious benefits, most homeowners misunderstand the repercussions of it. If a homeowner only makes the minimum payments each month, then a huge load of debt may occur at the expiration of the HELOC. There’s nothing wrong with having a HELOC, but a homeowner must fully understand the issues and challenges of having one.

What is a HELOC?

A HELOC is a form of a loan where the borrower can receive money when needed. When a borrower is approved for a line of credit, he can use the pre-determined amount of money or credit given by the bank to make purchases with special cheques. For example, if the bank lends you $15,000 line of credit, then that means you’re free to use that money. So if you want to do a renovation in the bathroom, and it costs $2000, you can take that $2000 from your line of credit, and continuously pay it off with monthly payments with interest. But if you don’t use any of that $15,000, then you don’t owe the bank anything at the end of the line of the credit. To qualify for a line of credit, the amount you’ll receive will be based on the amount of equity that you have on your home, as well your credit history. The rates of the line of credit will vary based on the lender, but typically they are variable rates. These will be determined by your credit history and the loan to value ratio.

What are the benefits of HELOC?

A HELOC can have many benefits and can be very helpful for homeowners. Like stated above, homeowners can use a line of credit to do major renovations in a home, or to put it towards the education of their children. The HELOC can be used for other purchases as well. The other large benefit of a HELOC is that it can be used for debt consolidation. This can be a risky move, but if you’re in the dumps financially, then a line of credit can be a quick and temporary way out of the pit. Essentially, you’ll have to pay more to the bank by doing this, but if you eventually make the correct payments on time your debt may begin to disappear. If you get a line of credit and make all the payments on time and even pay off some earlier than required, then a HELOC can increase your credit score. You can increase your chances of better credit if you only use less than 30 percent of the line of credit given to you.

What to watch out for when having a HELOC:

Once you get your HELOC, you’re usually give a long-term “draw period” which is essentially the period until the loan expires and when you have to complete all payments by. It can be a long time, and the monthly minimum payments can be low, so home buyers have to wary of how they use their line of credit and should keep up with the payments. It’s incredibly easy for a homeowner to procrastinate on payments, persuading yourself that you’ll make the payments eventually. If you do not complete all your payments by the end of the draw period, you may be inflicted a lot more debt. As one of the benefits, a HELOC can help you get out of debt by paying off other loans and costs. However, if you continue to be in a tight situation, and can’t even pay the loan that you used to pay off your debt, you’re debt will just grow unmanageable to the point where you have the extreme risk of defaulting.  Another risk is the chance of interest rates going up – they can always fluctuate, especially if they are variable rates.

The long and low monthly payment can be extremely attractive to homeowners and it can be very to get carried away with the readily available cash that the HELOC offers you. Use it wisely because you do not want to acquire more debt by the end of the draw period. There’s nothing wrong with getting a line of credit, but make sure you do research before you even use it. Talk to your lender or even your Real Estate Associate on how you can reap the benefits of the HELOC, and not incur the losses or the disadvantages.