Is a Line of Credit Right for You?

With each mortgage payment, you’ve built up the equity investment in your home. Now, you’d like to leverage that equity to borrow some cash for a major expense like renovating your kitchen or buying a new car. Line of credit loans are a popular choice, and you’ve heard that interest rates are low, but should you apply for this type of home loan or something else? Here are a few considerations to keep in mind, when shopping for a home loan.

First, it’s important to understand how a line of credit (also called a HELOC) works. Unlike a “lump sum” loan, these loans allow you to borrow frequently against the loan limit and make payments based on what you’ve borrowed and a variable interest rate. Your payments are not fixed, because your balance and the rate fluctuate, like a credit card account. Naturally, when the loan period comes to an end, you must pay off the full amount.

To make an informed decision about a line of credit, ask yourself “how will I use my new loan?” If you’re trying to consolidate higher interest debt, you can use either type of home equity loan. If you need to pay for college tuition over several years, a line of credit probably makes more sense, because you don’t have to withdraw the total amount of your loan at once. Similarly, if you are renovating part of your home and the project will take more than a few months, this type of loan could save you money. You only make payments on the amount you have withdrawn – not the total amount you are entitled to withdraw.

When choosing a line of credit for debt consolidation, you should also consider whether or not you have the financial discipline to pay off your debt – and maintain control over future spending. Since your loan withdrawals are generally made with a credit card or special paper checks, you must resist treating the loan as if it was just another payment option. Use the line of credit to eliminate higher interest accounts, close those accounts, and keep your loan in good standing by making payments on time, every time.

Finally, a line of credit makes the most sense when you borrow small amounts and repay the principal quickly. With careful planning, you could save more money than if you’d selected a “lump sum” type of loan, because you aren’t paying on the full loan amount. By using the line of credit strategically, you can reduce the burden of debt, cover major expenses, and reap the benefits of using your home equity as a powerful financial tool.

Learn more about line of credit and other loan options at HomeLoanCenter.com.

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