How to Use a Home Equity Line Of Credit or Loan
Equity is the difference in your home’s worth and what you owe. A home equity loan or a home equity line credit (HELOC) are two common ways to borrow money. Borrowing money from your equity can be a great financing option for debt consolidation, home renovations, business start-ups, and helping loved ones.
Financial institutions love home equity loans and HELOCs because they can use your property to secure the loan if you are unable repay it. Credit lines are favored by consumers because they allow them to draw money at any time and charge a lower interest rate than credit card. A HELOC has low minimum payments. As someone pays down their debt, funds are available to them again up to a limit. HELOCs are a popular way of borrowing because of their favorable line credit interest rates and revolving credit access.
Are a HELOC and Home Equity Loans right for me?
You can use a line of credit or a one-time equity loan to finance anything, from major home renovations to large-ticket purchases. It is up to you how much and what you spend it for. If you are disciplined and stick to a repayment plan, a home equity line of credit can be a great financial tool. A credit line can be a way to get out of debt.
Here are some things you should consider before you apply for a loan or a home equity credit card (HELOC).
Home Equity Loan, Mortgage and Home Equity Line of Credit
What is the difference?
HELOCs and home equity loans as well as mortgages use your home to secure the debt. Consolidating debt can be done with all three. However, these are the only similarities.
What is a mortgage?
A mortgage is a loan that’s specifically designed to purchase real estate. The mortgage is secured by the real property. If the borrower fails to repay the loan, the lender can legally seize the property. As with any loan, interest is added to the principal. Each mortgage payment usually combines the principal and interest repayments.
What to do and what not to do when using your home equity
What is a Home Equity loan?
Home equity loans, also known as second mortgages, allow homeowners to borrow money against their equity. You can use the loan as a lump sum or one-time payment. It can be used to pay for home renovations or medical bills. Your home will serve as collateral and be repaid over a specified time. Depending on the way your lender structures the loan, and what you agree to, the interest rate may be fixed or variable.
What is a Home Equity Credit Line (HELOC), or Home Equity Line of Credit?
A home equity line-of credit (HELOC), which is similar to a home equity loan, uses your equity as collateral. This loan is a revolving credit line, not a lump sum. You have more flexibility with this type of credit line because you have access a pool of funds and you can choose how to use it. This credit line could be used to help with emergencies, debt consolidation, home improvements, and even daily spending.
Flexible payments can also be made towards your line of credit. You can pay as little or as much interest as you like according to your loan agreement. This means that there is no deadline for repaying what you borrowed. Variable interest rates are also available on lines of credit. They are lower than those offered by credit cards.
Credit cards are similar to credit cards, except that you pay only interest and only make payments for what you use. If you are approved for a $25,000 HELOC, but only borrow $5,000 from the bank, you will only have to pay interest on $5,000.
How revolving lines of credit work
Revolving credit can be used for credit cards or lines of credit. You can borrow up to a pre-approved amount and make payments. As long as your account is in good standing, you will have credit again.
If you spend $20,000 on your $40,000 credit line, you still have $20,000 available credit. Your credit available to you increases to $30,000 if you make a $10,000 payment (minus any interest). This means that you can spend $30,000 on your home, furniture, and even high-interest credit card debt. A home equity credit line can be tempting, just like credit cards.
Revolving credit can lead to serious debt problems
Living a credit-dependent life can lead to serious debt problems and financial troubles. Revolving credit does not require you to make a fixed monthly payment. Instead, you only need to pay the minimum amount. It’s easy for people to lose track of their debts or to wait too long before paying it off.
If the credit line only requires interest payments, it can make matters worse. You could end up in more debt if you only pay the interest. You don’t want them to continue paying no matter what the interest rate on your line of credit.
Make sure you decide if your purchase is a need or want before you pay for something with a Home Equity line of Credit
Ask yourself if you could make the same purchase using your home equity credit. It’s best to use your home equity line of credit if you have the cash in your chequing account to pay for it. HELOCs are not intended to cover everyday expenses.
If you have a large-ticket purchase that requires credit, determine if you are really able to pay it off and how fast you can do it. Keep in mind that interest rates may change.
Give yourself time to think it through. After a few days, you might find that you no longer need it or want it.
How to deal with debt from low interest loans or revolving credit lines
There are several ways to avoid falling into debt with revolving credits and living a credit-dependent life:
- Talk to your lender about automatic monthly payments. These will cover the principal and interest. This will allow you to pay down your credit line over a set period.
- You can set up automatic payments to cover more than the interest using internet banking or online banking services.
- You should create and use a realistic household budget. It should account for all your irregular/seasonal, weekly and monthly expenses. These “seasonal” expenses are often what you can pay for with a credit line.
- If you are in need of help, ask for it. Contact us if you are struggling to get ahead due to debt. We can help you by calling, email, or anonymously chatting online. One of our credit and debt counselors will gladly review your situation.