Loans and mortgages – Be smart about home equity

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Need money for home improvements? Got a kid in college who needs tuition? Maybe you need start-up cash for a new business. You may want to consider a home equity line of credit (HELOC).

Although you borrow money against the equity in your house, it works like a credit account. Rather than take out one lump sum, you have access to the money as you need it. You don’t pay interest until you actually withdraw money, and even then, the interest is tax deductible.

HELOCs have interest rates averaging about 4.5 percent, which is low when compared to 10-year fixed loans with rates around 7.25 percent. But you may have starter fees, annual fees, and other costs like minimum-withdrawal fees, inactivity fees, and early-termination fees. So check the loan terms carefully. You don’t want to take all the money you saved with a low interest rate and spend it on other costs.

Although it’s best to save for any large purchase, a HELOC may be a good move if you don’t know exactly how much money you’ll need or when you’re going to need it. It also makes a good safety net in case there’s an emergency or a period of unemployment when you need cash right away.

But don’t forget it’s a loan against your house, and you could jeopardize your home if you can’t pay it back. Stay away from a HELOC if you have a spending problem or want to use the money to pay off an enormous credit card bill. You would just replace one large debt with another.

If you take out a line of credit, plan on paying it off within a few years. The interest rate on a HELOC is adjustable, so the sooner you pay it off, the less chance your rate will go up.

A HELOC can save you money if you use it wisely. But if you think having cash at your fingertips would temp you to over-spend, then be smart and find another source of cash.



All the best,



Timben