Mortgage / Equity

Equity
Home Equity
Mortgage
Home Equity Line of Credit

A home equity line of credit or HELOC is an excellent way of tapping into the value of your home to pay for repairs, remodeling and expansion.

The way a home equity line of credit works is simple. If the value of your home exceeds the principal of your mortgage you have equity. You simply borrow against this equity to finance the repairs or remodeling.

Advantages to a Home Equity Line of Credit

The difference between a home equity line of credit and a mortgage is that you only borrow what you need. In a mortgage you borrow a fixed amount and you have to pay interest on the entire amount whether you spend it or not. With a HELOC you only have to pay interest on the amount you use.

Using a HELOC you only need to borrow the amount of money you need to pay for the repairs. For example you could have the repairs done then borrow just enough to pay for them. This means you will have less debt on your house and a lower payment than with a second mortgage.

Disadvantages to a HELOC

The biggest disadvantage to a home equity line of credit obvious you will have less equity available in your home to use in the future. Until you pay the HELOC off the equity you borrowed against won’t be available.

You could also reduce your ability to open a second mortgage or refinance your home by opening home equity lines of credit. Encumbering your home with additional debt could also make it harder to sell.

Another disadvantage is that the interest rate on a HELOC will probably be much higher than that on a mortgage. You will also have to pay the equity line of credit back sooner or later which will reduce your disposable income for a period of time.

Qualifying for a Home Equity Line of Credit

To get a home equity line of credit you will have to have equity in your home. This means that your home’s value must exceed the principal of your mortgage a considerable amount. If your mortgage principal exceeds the value of your home you have no equity.

You must check on your home value before applying for a home equity line of credit. If home values have fallen in your area you may not be able to get a HELOC. The amount of home equity you can borrow may also be limited by falling home values.

HELOC Dangers

Using two many home equity lines of credit can lead to foreclosure. If a homeowner takes out a lot of HELOC debt they can’t pay off the home could end up in foreclosure.

This means that homeowners should be careful about using home equity credit. A homeowner should only take out a home equity of line credit when he or she knows that he or she can pay it off. If there is any doubt about being able to pay off a HELOC you should never take one out.