Home Equity Line of Credit - Can It Help You?

A home equity line of credit, like a home equity loan is a loan that is secured by your home. This line of credit is typically used for ongoing expenses such as home improvements, educational or medical expenses.

You will usually be allowed to borrow between 70-80% of your home’s value minus any amount you currently owe on the home. You will also need great credit to be considered for this type of loan.

Your bank or credit union will determine the amount you are allowed to borrow. They will also set a draw period. This is a specific amount of time which you will be allowed to borrow from the line of credit.

Unlike a home equity loan, you are not required to take the full amount all at once. You only borrow what you need as you need it during the draw period. Your monthly payments will change from month to month depending on how much you borrow and interest rates.

You may not end up borrowing the maximum amount allowed. That’s fine since you only pay interest on the amount borrowed, not the amount available.

Most of the time, the interest rate is variable on these lines of credit. However you may be allowed to secure a fixed rate loan on the balance due at the end of the draw period.

Some banks even allow interest-only payment options for a certain amount of time. This will significantly lower your monthly payments but will not reduce your principal at all.

The interest paid on a home equity line of credit is tax deductible. Interest rates are also usually much lower than with an unsecured personal loan. This can make it an attractive option for some expenses.

However, be aware that your home is collateral and will remain that way until the line of credit as well as your original mortgage is paid in full. Be sure you have a budget in place and can afford to make the extra payments before considering this option.

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