If you are planning for a major purchase or consolidating debt, a line of credit from your home equity is a popular option. A Home Equity Loan or Home Equity Line of Credit (HELOC) gives you access to cash using your home as collateral at a relatively lower interest rate compared to credit cards.
Are you financially ready to take on a Home Equity Loan or Home Equity Line of Credit? Before you start the application process, it’s important to ask these three questions.
How Much Debt Do I Currently Have?
Before taking a Home Equity Loan or Home Equity Line of Credit, it’s important to take a step back and re-evaluate how much debt you are carrying right now. Any loan against your home is considered a “second mortgage,” which means your home could be repossessed if you stop making payments on the loan.
Using home equity to pay down high-interest credit cards is trading one debt for another. If you were to continue to spend out of control on those cards, adding the Home Equity Loan or Home Equity Line of Credit can make you more vulnerable to financial difficulties. Before you start the application process, take a step back and evaluate how much debt you have, so you can ensure a new (or consolidated) payment is affordable for your budget.
What Am I Using My Home Equity Credit For?
There are many reasons homeowners consider taking credit against their home equity. Some of the more common reasons include consolidating high-interest credit card debt, paying for expansive home renovations, or funding a child’s college education.
Understanding your “why” for seeking a Home Equity Loan or Home Equity Line of Credit will help you set smart goals. For example: If you are consolidating credit card debt, then your “why” should include not only paying down that loan on time, but also a plan to reduce or eliminate your spending on credit cards so you don’t end up with another big balance down the road. If you are doing home repairs or upgrades, it’s important to consider your savings from additions like energy-efficient appliances alongside estimating the value added to your home when it’s time to sell.
Do I Have a Plan to Pay It Back in Time?
Before taking on any new debt, it’s crucial to determine how long it will take to pay off. There are different ways you can elect to pay it back based on your goals.
For credit card consolidation and major purchases, it’s key to understand how much credit you are taking and what it will cost to pay that debt down. This is where it’s important to decide between a Home Equity Loan and a Home Equity Line of Credit. Home Equity Loans are fixed-term loans where you receive one lump payment with equal monthly payments each month, making it a little easier to budget for. Home Equity Lines of Credit are great for those situations with a flexible budget, like home renovations or financing an education, as you can choose how much to take from the line of credit for an extended period – but it may change your payment from month to month. Either way, it’s important to project the payment amount and incorporate it into your budget, so that you don’t fall behind or rely on other forms of credit.
If you are planning on an investment to improve your home’s value, you will need to determine if you plan on living there for an extended period or are making the upgrades in preparation for selling. Should selling be in your plans, you could pay off the home equity credit (the “second mortgage”) with the proceeds from selling your house. Just be sure that the cost of the upgrades justifies taking the credit and won’t leave you with a balance after the sale.
Using your home’s equity to pay for life’s expenses can be a smart way to make the financial burden easier, but only if you have a plan to put it all together. Understanding how the payments will fit into your budget, your overall goals and working with a professional can help you navigate your situation to ensure you’re making the best decision.
Not sure what type of home loan or line of credit is right for you? Want to consider all your home loan options? Talk to a SESLOC Mortgage Loan Officer today to get an idea of what works best. Contact them today and get started on the right path for your financial goals.