How to Tell if a Home Equity Line of Credit is Right for You

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By ccard123
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Home Equity Line of Credit

A home equity line of credit can be a great tool to use if you need to borrow a significant amount money but don't want to pay the high interest rates that credit cards often charge. Banks offer a home equity line of credit for a lower interest rate than they charge for credit cards because with a home equity line of credit, the equity that you have in your house acts as collateral for the loan. There is no collateral with a credit-card loan.

Because banks have more security with a home equity line of credit, they expect to have fewer defaults, and so they can offer a home equity line of credit for a lower interest rate than they can offer a credit card.

Difficulty: Easy

Instructions

Step 1

A home equity line of credit might make sense for you if you would prefer to receive your loan in small batches, rather than in a single lump sum. Once you have been approved for your home equity line of credit, your bank will allow you to withdraw money against your line of credit as you need it. You will only need to pay interest on the amount of money that you have out at a given time. For this reason, a home equity line of credit can afford you maximum flexibility in your borrowing.
Step 2

Because banks offer you so much flexibility with a home equity line of credit, they also usually require that your home equity line of credit is offered at a variable interest rate. This is bad news if you hope to lock in a low interest rate and pay the loan back over a long time; however, if you are planning to pay back your home equity line of credit over a short period, the home equity line of credit might be right for you.
Step 3

Another piece of information to keep in mind about a home equity line of credit is that your monthly payments will fluctuate with the interest rate. If you don't have much breathing room in your budget, and you put a premium on having predictable monthly expenses, the home equity line of credit might not be for you--it's always possible that interest rates could unexpectedly spike, which would suddenly increase the amount of your monthly minimum payment. If you are looking for steady monthly payments, you might be better off checking out a home equity loan.