There is nothing more exciting than the feeling of becoming a home owner. With your homeownership comes the benefit of being able to tap into your home equity with a home equity line of credit.
For new investors, here is a quick look at the pros and cons of the HELOC or the Home Equity Line of Credit. Using your property as collateral, the lender approves you for a specific line of credit against the equity in your home, allowing you to access the money when you need it via a check book or a credit card. This is in contrast with the Home Equity Loan (mortgage), where you get the entire loan amount at a fixed rate of interest, repayable monthly.
What are the pros of a HELOC?
With a HELOC you get instant access to a specific credit limit that you can use to fund home remodeling, educational courses, medical emergencies and similar expenses. You can access the funds only when you need them. The interest rate is lower than that of a private personal loan or a credit card loan. The interest may be tax-deductible and payable only on the amount you borrow. The loan can be repaid partially or fully during the specified period. Your lender may let you switch to a fixed interest rate or fixed term installment loan.
What are the cons of a HELOC?
However you see it, a home equity line of credit is debt. Your lender’s terms may stipulate a minimum amount for you to withdraw, which may be more than you need. There is the cost of obtaining your HELOC which includes property appraisal, legal fees, and possibly closing costs. Since the interest rates are variable, you could end up paying more than you expected.
While a HELOC is flexible for withdrawal, it can be tempting to over spend with this money available whenever you need it. You also stand the risk of damaging your credit in the unusual case you that you don’t repay as per your agreement.
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