Do you use your line of credit like a ATM machine?
If you do, you are not alone. With the interest rates being quite low right now, and more and more control put in front of us for our banking. It is becoming easier to just hop on line and transfer money from that line into your checking account.
But, unless there is a specific renovation, or larger investment you are making, you should not be using your house as a source of unlimited cash.
At the end of the day, it is really no different than a credit card. You can still run it up to the max, and you will still have to make minimum payments and pay interest for months and maybe years.
The problem with these minimum payments on these loans, they are about the same as the interest cost. Therefore you are not really getting rid of any balance.
A line of credit, especially one that is secured by your house, will usually be a better interest rate, but it is still a loan. You are still spending the banks money, not yours.
A bank loves nothing more than hauling in the interest only every month, or the minimum payments, because then they have a steady supply of money from your line. It is not in their best interest to have you pay it off.
Now, if you have a credit line that is not secured by anything, such as the house, then you are most likely going to be paying a much higher interest rate. Not much different than a credit card.
So, next time you have to have that perfect purse or great set of golf clubs and you see how easy it is to just transfer some money from this credit line online, take a look at the bottom line. Just how much interest are you going to be paying on those golf clubs? Is it really a good deal, if you keep using your credit, and just make the minimum payments?
If you are in a position of high interest rates on your credit line, and you are looking to get it paid off, and you have the discipline to stay with a payment plan, then you should look into getting one based on your house. If you have the equity in your house, your bank will usually give you a loan against your house, with a much lower interest rate, then you can transfer your higher interest credit to this one, and stick to some kind of payment plan.
The problem with a credit line, is that you pay it like it's a bill, and you have a choice as to whether you pay the minimum or more. Where as a regular loan, will have a set amount to pay each month with a end date, or the same with your mortgage.
What you can do, is get the bank to set up an automatic withdrawal from your daily checking account to pay this loan per month, just like it was a mortgage or loan payment.
If you find it hard not to dip into there while doing your online banking, then you could get the bank to make it so, you can't get at it online. That you would have to go into the bank to transfer any money. This way you will have time to think about it and decide if that online shopping you were doing was really worth it. Call it the "cooling off period"
Lines of credit and credit cards, have become easier and easier to access online. You know yourself whether you have the discipline to use it for the renovations or larger investment purchases, or whether you would just start transferring money to pay bills or purchase that great pair of shoes, or that large screen TV.
Remember, at the end of the day, you are not spending your money that you have earned when you use credit, you are actually spending some other guys money, and he will charge you dearly for it, if you don't' pay. A open loan on your house, is good for any improvements that will make your home more valuable, this can offset the interest and is worth the loan. But to purchase shoes, golf clubs, and vacations with money you did not save up yourself? Not good. Your Line of credit is not a ATM machine!
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