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What Is A Good Use Of A Home Equity Line Of Credit?

Home equity lines of credit, often referred to as a HELOC, offer the best of both worlds between typical credit card terms and home equity loans. Normally home equity lines of credit do not have the exorbitant interest rates of credit cards nor do they result in a lump sum cash payment which must be used for specific purposes as designated by most home equity loans. Because of this freedom, HELOCs can be very smart choices financially if used correctly.

Credit cards are good for purchases of small amounts at local area retailers and online and home equity loans are good for large remodels such as a kitchen or bathroom and repairs like replacing a roof or deck. Home equity lines of credit however work best for situations like paying off the remaining balance on an automobile or paying for braces for a child. A HELOC is useful for those expenditures which don't fit into either category of minor purchases or very large repairs.

Access to a home equity line of credit is normally very easy as the bank or financial institution will provide checks or a debit card which will directly access funds available from the account. Since interest only begins to accrue once the check has cleared the bank it is easier to manage the inflow in outflow of funds and associated interest on a HELOC. Still, a home equity line of credit should not be seen as a piggy bank of additional funds to be used haphazardly on inconsequential purchases.

Home equity lines of credit are secured against an underlying asset which in this case is real estate. The criteria to determine how large the line of credit is available for use is roughly 75% to 80% of the home's appraised value minus the existing balance. For example, if a homeowner seeking a HELOC owned a $200,000 home with an outstanding mortgage of $120,000 then the amount available for the credit line would be 80% of $200,000 minus $120,000 which equals $40,000.

It is important to keep in mind that home equity lines of credit are secured against real estate which in most cases is a primary residence. Should the borrower default on loan, then the institution that has issued the home equity line of credit has every legal right to foreclose on the home to recoup the money lent. HELOCs while often perceived as just directly accessing equity are actually considered by most financial institutions as second mortgages. This is important because the homeowner should view a HELOC as having the same legal obligation as their primary mortgage payment.

Home equity lines of credit are a great way to pay for those large one time expenses which don't fit on a credit card and are not appropriate for a home equity loan. If used correctly, a HELOC can be a valuable tool to consolidate credit card debt, pay off an auto loan or cover a child's tuition for a semester. Making large purchases at low interest rates using the equity in your home can provide many opportunities not available to most individuals who don't own homes.