Home-equity Lines Can Be Life-lines

With the economy flagging and the housing crisis still underway, now is the time to look ahead financially. Consider a home-equity line of credit as a valuable backup source.

What Is A Home-Equity Line of Credit?

A home equity line of credit uses your home as collateral. The credit limit on a home equity line usually takes out a percentage of the home’s appraised value and takes away from the balance owed on the mortgage. The maximum you can borrow depends on the equity in your home. Most plans set a fixed period when you can borrow money, and at the end of this period, you may be able to renew the credit line.

The Advantage Of A Home-Equity Line

In an emergency, such as losing a job or having to pay a large sum for home repairs, having a home-equity line of credit is a great financial resource. Before the economy falls further, acquiring more credit is a smart move, since afterwards, it will be even harder with lenders resorting to stricter standards than in recent years. The best part is that you only pay interest if you borrow -- there are no penalizations for never tapping into the credit.

Even though you may not be able to borrow as much as you could just a year ago, having the extra credit is better than being financially strapped. Moreover, many homeowners have already used their equity to refinance with larger loans. However, there are plenty of homeowners with houses worth more than any mortgage debt.

Things To Know Before Taking Out A Home-Equity Line

Home-equity lines usually do not involve fixed interest rates, although most lenders provide a rate with a margin of two percent. Every now and then, you might be able to find a very low introductory rate that lasts for six months or so, and all lines with variable-rates must have a ceiling on the interest rate, thus ensuring that you will not have a credit debt that spirals out of control.

In order to obtain a home-equity line of credit, you will need to have your property appraised and pay an application fee. There may also be some upfront charges or closing costs, as well as an annual membership price or transaction fees.

Before signing up for a plan, think about how you will be able to pay it back, whether through monthly payments and interest or waiting until the credit line ends and paying off everything all at once. Remember that with variable interest rates, monthly payments can change. For those with a good credit history who want a backup plan, think over the idea of opening up a home-equity line.