Can You Get a Line of Credit Against Your Home?
You can get a line of credit using your home as collateral through what is commonly referred to as a HELOC. A HELOC is a home equity line of credit that is one of two common approaches to getting financing using the equity in your home. The other is a home equity loan.
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Basics
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As opposed to a home equity loan that is amortized over a period of time, similar to your first mortgage, a HELOC is a revolving credit line secured by your property. In each case, the equity financing is a secondary lien to your mortgage. This means that in the event of foreclosure, your first mortgage has first claim on your property. HELOCs include credit limits set by your lender and typically operate with a variable interest rate. This means your rate changes with prime interest rates.
Purpose
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Equity loans and HELOCs are commonly used for major expenses like home renovations and college tuition. LendingTree notes that most financial experts discourage their use for non-essential purchases because of the risks of losing your property if you default. Homeowners that opt for lines of credit versus loans generally prefer to have flexible access to a credit line without necessarily committing to a specific loan amount. This means that you only pay interest on the actual amount you use.
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Benefits
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The aforementioned flexibility is a primary benefit of a HELOC. In addition, HELOCs typically have no closing costs, and their interest rates generally are much lower versus credit card interest rates because the loan is secured by your property. Some borrowers use HELOCs in lieu of car loans because the interest on equity financing is often tax deductible. HELOCs have draw periods--often 10 years--when you can pay interest-only on your principal balance. However, you can elect to pay off your balance any time you like. Additionally, if you have a HELOC and decide you want to convert to a home equity loan, this usually is possible.
Debt Consolidation
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Because of its low-cost financing and flexibility benefits, HELOCs often are recommended for homeowners consolidating debt. Once approved for your line of credit, you can pay off higher-interest credit cards and other personal debt. This potentially saves you hundreds or thousands of dollars in interest. It also allows you to make one payment to one creditor. The risk in consolidating debt with a HELOC is not changing your spending habits to prevent another buildup of credit card debt.
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References
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