Versatility of HELOCs
Home Equity Line of Credit
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When it comes
to versatility, few lending options can equal a
home equity line of credit (HELOC). Unlike a
home equity loan, which requires borrowing a
lump sum at a fixed rate, the HELOC offers
exceptional flexibility.
Your home’s
equity can be one of the best ways to find
capital when funds are scarce. And the best way
to tap into this equity is with a home equity
line of credit (HELOC), which gives you the
flexibility of a credit card and the
tax-deductions of a mortgage. Since a
HELOC
allows you to draw funds for myriad reasons, it
has become the Swiss Army Knife of financial
instruments
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One credit line,
many uses
Popular reasons
to tap a home’s equity include
home improvement loan
needs, debt consolidation, a second home
purchase, vacations, and college tuition. Many
small business owners will opt to use a HELOC
instead of applying for business loans, because
the process is easier and less expensive.
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In recent years, debt
consolidation has proven to be an extremely popular use
for the HELOC. It can drastically reduce a borrower’s
monthly payment by offering lower interest rates than
credit cards. On the flip side of the coin, people who
are debt-free often use the HELOC to buy a car, taking
advantage of the tax-deductibility of the interest
payments.
Rainy day fund
It’s a basic rule of
thumb to keep three to six months of living expenses
stowed away in a liquid account as a rainy day fund.
Even though it’s a great savings habit, consumers are
forsaking savings, and using a HELOC as a source for
emergency funds. If you choose this route, make sure
the lender you select doesn’t charge a fee just to keep
the line of credit open. Just because you have a rainy
day fund doesn’t mean the institution should rain on
your parade.
Fee Free
HELOCs can be fee-free.
Avoid a lender who wants to charge you for writing
checks or proposes exorbitant closing costs. Some
lenders might require an appraisal; but there are plenty
of lenders who will waive the appraisal fee. The cost
of writing checks should also be free of charge.
Convert to a fixed-rate loan whenever you want
Since HELOCs are tied to
short-term interest rates, they may rise suddenly. If
they do, you may find that a fixed-rate
home equity loan
can save you money in interest payments over the
long-term. If you choose to convert, expect a higher
monthly payment. There may also be additional closing
costs, so do the math to see if this move is right for
you.
These features, as well
as caps on interest rate increases and no prepayment
fees, are all versatile benefits that underscore the
HELOC’s Swiss Army Knife reputation. About the only
thing you can’t do with it is whittle, or use it to
spoon up beans by the campfire. Short of those tangible
benefits, the HELOC could be the versatile borrowing
tool for just about anything you need. |
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