The Pros and Cons of HELOCs
Just like with anything else in this life, a home-equity line of credit can be a really great idea for some people. And on the other side of the coin, spending this money might not be the best way to use the equity in your home for others. So it really comes down to each individual situation.
With that in mind, we will take a look at some of the positive aspects that people experience when they take out a HELOC. And we will also look at some of the reasons why a home-equity line of credit might not be good for you.
The Pros of Home Equity Lines of Credit
As you are about to learn, there are many advantages to taking out a home-equity line of credit. Some of our favorites include the following:
- It’s easy to get access to cash flow – when you have value in your home, but do not have a lot of additional capital on hand, taking out a home equity line of credit is certainly a good idea if you will need cash in the immediate future. It’s so easy to get access to this money because the bank knows the value of your property, they know how much money you’ve sunk into the place to pay down your mortgage over the years, and they are willing to lend you some of that money back at a low interest rate.
- You only have to pay interest on the amount of money that you borrow – to help you get a better feel for home-equity lines of credit, we are going to take a moment to explain how they work. If you go to a bank and apply for a home-equity line of credit, they will let you know how much credit they will extend you.
So, if the banks appraiser feels that your home is worth $600,000, and you only have a mortgage for $300,000 on your home, you technically have $300,000 worth of equity in your property. The bank will determine how much money they are willing to lend you based on the $300,000 in equity and then you can borrow that much at any given time.
But nobody is saying you have to borrow the entire line of credit. On the contrary, you only need to borrow the amount that you absolutely need and nothing more. By approaching it this way, you only have to pay interest on the amount that you’ve taken, which will make your monthly interest payments much lower than they could be.
The Cons of Home Equity Lines of Credit
As mentioned, for certain people taking out a home-equity line of credit will have its downsides. Some of the potential disadvantages include:
- The unpredictability of variable interest rates – in many instances, you will get a variable interest rate when you take out a home-equity line of credit. If this is the case, your interest payments can be very low at some points, but if the interest rate goes up then your payments are going to go up along with it.
According to Homeequitylineof.credit, experts providing an explanation of home equity line of credit options, “Just look up the interest rates to see which one is the most appealing.”
No one is saying you have to accept a variable-rate home-equity line of credit. You can get fixed rate if you prefer, so also keep that in mind.
- Declines in property value – if the value of your property suddenly declines quickly, like how it happened in 2008 to many homeowners, you may end up owing more money than your home is actually worth. So that is certainly a potential drawback.
Clearly, there are certainly pros and cons to taking out a HELOC. Consider them and choose what’s best to meet your personal needs.
Founder Dinis Guarda
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