Pros & Cons of Home Equity Lines of Credit

Home equity lines of credit are a way for home owners to use some of the money they have already used to pay down their home mortgage. The home's equity is the amount of money that the homeowner has invested in the home. The line of credit borrows against that amount up to a pre-determined maximum.

Significance

Because so much money is spent on paying home mortgages, many homeowners find that their home equity is their largest asset. If an emergency expense comes up, such as an unexpected medical bill or home repairs, many homeowners choose to use that equity as a revolving line of credit. The credit line is used like a credit card with the bank determining the amount of credit available.

Function

Home equity lines of credit can be given out by the bank in several different ways. Some banks issue the entire amount in a cashier's check that can be deposited or cashed. Other banks issue a book of checks that can be written on the credit account the same way that credit card convenience checks are used. With some credit lines, a debit card is issued. The card is used like any other debit card with the money being deducted from the home equity every time it's used.

Benefits

The main benefit is having the money available when there is an emergency. A job loss or a large expense can put a serious strain on a family's financial situation. With an equity line available, there is money that can be used at any time whenever the need arises. The money generally comes with very low interest rates. Many homeowners can get their loans for very close to the prime rate.

Considerations

The cons of this arrangement are that the money can be depleted quickly and put the home in jeopardy. Defaulting on the loan generally means that ownership of the house is transferred to the bank. There are also banks that will loan more than the homeowner has in equity. If the homeowner defaults, they not only lose the home but they will still owe money to the bank after the foreclosure.

Warning

Home equity credit lines that come with a debit card make it easy to use the credit each day. This has gotten many homeowners into trouble when they debit more than they can easily pay back. The money borrowed in these credit lines is guaranteed with the home as collateral. Homeowners can often borrow tens of thousands of dollars as part of their line of credit, which can be tempting to use for luxury items. Anyone using one of these credit lines should be careful to use the credit only for emergencies.