Advantages of a Home Equity Line of Credit

When you finally have some equity built up in your home and you are thinking of financing a large project, your might consider getting a home equity line of credit from your bank or mortgage lender. There are many advantages to a home equity line of credit, but also many drawbacks as well.

Definition

The money your home is worth minus the amount left on your mortgage is called the equity of your home. You can use this equity to essentially create a credit card that uses the money in your home. This money sits in the bank until you want or need it and you can take out as little or as much as you want. The only caveat is that the money then must be paid back like a credit card and you will be charged interest.

Flexibility

If you don't know how much a project is going to cost or worry there may be some unexpected expenses, you have a cushion with a home equity loan versus a second mortgage loan. For example, if you have $20,000 in home equity loan credit and a $10,000 project ends up costing $15,000, the money is available. A second mortgage is a for set amount of money and if you need more, you must go back to the bank and go through the process all over again.

Payment

With a home equity line of credit, you only pay on what you have borrowed. The payments and interest are based on that amount and the rest of the available balance sits unused. If you need more, you can take it out and it will be subject to the same interest.

Availability

A home equity line of credit is available to use 24 hours a day seven days a week for as long as you have your home. If you want money for a down payment on a new car, for a vacation or for a house project, you can take the money out at any time. A loan is a one-time shot that is usually done for a specific purpose.

Caution

A home equity line of credit is like any other type of credit. If you take money out and don't pay it back, you can be assessed fees and penalties; it will hurt your credit rating if you are late on payments or default and will be reported on your credit report. Perhaps, the biggest danger is that--since it is secured by your home--if you default, the bank or lending company can take your home in order to get the money back.