The poor economy has many people searching for additional financial options. One option with a variety of advantages is home equity credit. There is a lot to consider before deciding to take out home equity credit, but the following will give you a basic introduction to how it works and some key advantages and risks.
What It Is
Home equity credit is a revolving form of credit that uses your home as collateral. Most people consider their home as their greatest asset and opening a home equity credit line is one way to put that asset to use. A lender will decide your fixed limit, or in other words, the maximum amount you can borrow at any one time. Fixed limits are quite regularly determined by assessing the value of your home and then subtracting the balance owed on your existing mortgage from a percentage (70% for example) of that value. Lenders will also take into account your income, debt, credit history or other obligations to determine your ability to repay.
Once the limit is fixed there is usually a period established inside of which you can borrow as often as you’d like. Some plans require a minimum withdrawal each time you borrow and the funds are usually accessed by special checks. At the end of the period (10 years for example) you will quite often be given the option to renew the credit line. If you choose not to renew the credit line, you will be required to pay off the credit in full or over a payment period decided by your lender. As you can tell, many of the specifics will vary according to individual lenders and specific financial situations.
Advantages
Utilizing a home equity line of credit can be useful for large purchases (medical bills, education, etc.) when money is tight. Home equity credit lines usually require low costs to maintain and have low introductory rates. Another big advantage is the flexibility it affords the borrower, both in the amount you are able to withdraw as well as the number of times you are able to borrow.
Risks
While home equity lines of credit offer many advantages, you will want to be careful in considering and maintaining a line. If you are only meeting the minimum payments throughout the borrowing period, then your monthly premiums will spike sharply when the payment period begins. To avoid this, try to exceed your minimum payments so that you are paying off the principle gradually over time. Also, beware of ballooning rates. The low introductory rates can be deceptive, so read the fine print and be aware of any additional fees, such as early-termination fees.
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