Home equity loan rates are at an all time low. But there are a few things you should know before getting started. Home Equity Line of Credit also called a HELoC has gotten a lot of press over the last few years but it has been used for some time to help people make home improvements, pay off debt, and send kids to college. What are the pros and cons of using your home as collateral for a an open line of credit? Here are some things to consider:
Pro#1 - Since you are borrowing over longer terms you can make very small payments for larger sums of money. Take for instance this example. You may have a car loan which charges 4% interest and your payment is $300 a month. Most of these types of loans are on a 6 year or less term. If you took that same loan on a home equity line of credit you could put it on a 30 year loan and the payment may be less than a hundred dollars.
Pro#2 - Most people don't live in their home for the whole term of the loan. This means that when you pay off your car with your HELoC and then sell your home 6 years later, you didn't actually pay all of the interest on your car and you own it. There are many subtle uses of these types of home loans.
Pro#3 - Home Equity Loan Rates are at all time lows. Rates over the last 50 years are very low. A person can get money at low interest rates and lock in those rates for the term of the loan. Using money from a HELoC that is at 5% to pay off a personal credit card at Lowe's that is at 18% is simple math. Unlike being tied to a specific department store, you can generally write checks right from your account to pay for whatever you like.
Cons#1 - If you don't manage it you can get yourself in trouble. You are adding debt and eating up your equity. If you max yourself out and the real estate market shifts down, you could find yourself upside down in your home where you owe more than it is worth.
Cons#2 - Your account could be frozen if your home goes down in value. Many lenders will do periodic appraisals to check on the value of the home. This will impact how much money you have available since they take the value of the home minus what you owe and then give you access to a percentage of what is left over.
Cons#3 - Be careful with interest only or adjustable rates. Interest only home equity lines of credit can reduce the amount you pay because it takes only the interest rate portion of the payment. This means you aren't paying any of the loan principal back. Also watch out for introductory terms that expire. Adjustable rate home equity loan rates are notorious for raising payment when you aren't prepared for them. If the rates are adjustable and they go up it can make budgeting very hard.
The key is HELoCs can be a great tool. With home equity loan rates at all time lows you can leverage your money to your advantage. Make sure to look at the APR (Annual Percentage Rates) when comparing loans. the APR is when they take the fees and add them into the loan so your loan rate includes all costs of getting the loan. Some places can advertise a low interest rate but then charge huge fees. When comparing loan rates always compare the APR. As with any financial tool you need to get educated and use it responsible. Ignorance and mismanagement are the cause of most financial trouble. Shop rates and read the terms and use your next home equity line of credit to your advantage.