A Publication of WTVP

The spring and summer seasons bring to light all the home projects (or problems) that have been hidden by the long winter and holiday season. Now is the time when reality sets in.

For some it is, “We added that deck and fencing last year and need to consolidate our debt.” For others: “It’s time to replace the kitchen appliances” or “Susie has been accepted for the prestigious semester abroad program next year.” When unexpected expenses arise, there are many options available to fulfill the financial needs. Two of the most underused options are home equity loan products and the home equity line of credit. If you are a homeowner, either can be a great option for you.

One of the biggest reasons people use a home equity loan is for home improvements. Home improvements are good ways to utilize equity in your home to increase its value—and the return on your real estate investment.

Another good reason to utilize a home equity loan is to consolidate debts. If you have balances on several high-interest-rate credit cards, it can often be to your benefit to consolidate all those loans. Not only will you trade writing several checks each month for writing just one, you will trade in higher interest rates. The result will be a lower payment with significant interest savings.

Home equity loans or lines of credit can be viable sources of funds for the situations mentioned above. There are some nice benefits to these products, but there are also some misconceptions.

What is a home equity line of credit?
A home equity line of credit is a form of revolving credit in which the equity in your home serves as collateral. Besides the uses mentioned above, many homeowners use home equity credit lines for major items such as education, vacations, weddings, emergency repairs, unexpected bills or medical bills, but they can also be accessed for day-to-day expenses and is as easy as writing a check.

With a home equity line, you will be approved for a specific amount of credit, and you can then use up to that amount in either a lump sum or as needed over time. And, you’ll only pay interest on the amount that you actually use—not on the entire credit line.

Once approved, you’ll be able to use it as you wish, for just about anything. Typically, you will receive special checks from your bank to draw on your equity line, or you can draw cash as well. The length of terms for a home equity line of credit is usually five or seven years, but you may be able to set different terms. Another nice thing about a line of credit is that, as you pay it off, those funds stay available to you during the term for which the line of credit was set up. For example, say you have a line of credit for $20,000, and you use $5,000. Your remaining line of credit is $15,000. When you pay off that $5,000, your line of credit is back to $20,000 to use again. No hassle of applying for a loan every time you need cash. You just write yourself a check. A home equity line of credit is good when you have large expenses coming up but do not have an exact figure, such as a wedding, large home improvement projects or college tuitions.

Lines of credit vs. traditional home equity loans
If you are thinking about a home equity line of credit, you might also want to consider a traditional home equity loan. This type of loan provides you with a fixed amount of money, repayable over a fixed period. In most cases, the payment schedule calls for equal payments that pay off the entire loan within the loan period. You might consider a home equity loan instead of a home equity line if, for example, you need a set amount for a specific purpose, such as a new car, home repairs or to consolidate debt.

Benefits of home equity loan products
Either of these home equity products are great products that can be used for virtually any purpose. There are several key benefits why people would choose one of these loans over a traditional loan.

One reason is that the interest rate is typically lower than other types of loans. For example, if you were to use a home equity loan to purchase a boat or RV, the interest rate is typically much lower than a recreational vehicle loan. There are also usually tax advantages when using a home equity loan—but consult your tax advisor to be sure. The lower interest and tax advantages are two benefits that make a home equity loan a very attractive option. iBi