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We all know by now that home owners have a hidden savings account…its called HOME EQUITY.

Home equity is the value of your home minus the remaining mortgage balance which is outstanding. This equity can be used to cover cost and expenses you may have or be used on home remodeling projects you wish to do.

Why Would You Want an Equity Line of Credit?

With a typical loan, which deposits a set amount of money in your account and begins charging you interest and payments at a fixed rate until repaid, a line of credit acts sort of like a credit card account. You do not need to pay interest on the full amount you have access to — only on the amount you have used.

Using an equity line of credit (also known as a HELOC) gives you greater flexibility with the least cost. Not only can you access the credit only as you need it,your monthly payments will reflect only the balanced used. Some lines of credit have only the interest as the minimum payment which can be helpful when finances are tight.

A HELOC is a great his if you don’t want to spend a large amount in one place..as well as if you want access to that credit agian, once it has been repaid, without asking for another loan.

What can the HELOC be used on??

So you have the loan…not what can you use it on. Here are some examples.

Consolidate Debts

Use the home equity line to reduce or consolidate your other debt. Not only will this help your credit score…but it can help reduce your interest payments as well.

Second Mortgage

Use the equity line to pay off or down your second…in some cases paying down will also allow you to reduce the interest rate. (which is normally higher on a second)

Add On, Update or Go Away

Cover the cost of an addition, redecorate, or go on a trip…all at a interest rate lower then most credit cards.

The Down Side of a Line of Credit.

Now it isn’t just ‘easy money’. It does have risk to it.

Some debts — like student loans- have features that you may not be entitled to if you switch them to an equity line of credit.

Other items like cars and vacations may seem like a good idea to buy with your home equity line of credit, but with the ability to pay only the interest you may find the motivation to pay off the debt is lacking and end up owing for items that have lost their value or were consumable. Plan to pay off the debt quickly for the most advantage.

A Second mortgage may not be a good idea depending on interest rates and your repayment terms. While lines of credit take advantage of current low interest rates you may find that your regular loans protect you better from fluctuating rates if you will not be paying the loan down in the next few years.

Using your finances wisely can give you great relief and freedom. Before taking on any financial obligations it is important to understand the risks as well as the benefits.