How are You Paying for Christmas?

It’ December 26th. The presents are opened, ribbon and paper thrown away, boxes broken down to recycle. You’re looking at a lot of money strewn all over the floor and the Holiday bills are going to be delivered within the next few weeks.

How are you going to take care of Holiday bills? You may want to rethink if you are considering a Home Equity Line of Credit.

You will want to have full knowledge of what you are getting into.

The decision of using your home as a piggy bank, shouldn’t be taken lightly. A home equity line of credit (HELOC) is using the equity you have acquired through your home payments and/or your home’s value increase, to pay for other expenses – i.e. Christmas presents. HELOCs do have their place and can actually save you when unexpected things happen like a loss of employment.

HOWEVER, there are risks involved when you use your home to repay other debt – like you could loose your home if you can’t repay it.

If you think you may want to take out a HELOC, there are things you will need to know like how the equity loan works. After that, you will want to compare the loan offers making sure you have the best terms for your needs.

How A HELOC works:

There is an opened-ended line of credit, many people compare to a credit card. Credit is accessed to whenever needed. The difference between a credit card and your HELOC, is the HELOC is secured BY YOUR HOME, your credit card isn’t. The advantage of a HELOC over a credit card is the amount you can borrow with the HELOC is generally higher and the interest IS TAX-DECTIBLE.

The downside of the HELOC is that there are fees to set up your credit line, time limit to use the credit line, which is typically a 10-year draw period followed by a 15-year repayment period. Some lenders may insist the debt paid off entirely, or refinanced, when the draw period ends.

BEWARE: HELOCs make it extremely easy to access the credit. You are sent a checkbook or card and allows payments to be made online. This makes it very very easy to get in over your head. Repayments plans vary by lends, so debt can pile up, especially if you pay on the interest only. BEFORE YOU BORROW, calculate how much debt you can afford!!

HELOC margins:

HELOCs interest rates are generally based on the prime rate (the interest rate banks charge to large corporations for short-term loans), plus or minus a margin. Factors that affect your margin is what the prime rate is when you applied for the HELOC as well as your credit score and what is left to pay on your home and current home value.

You can make a difference with your HELOCs margin by comparing those with lenders.

Some lenders will “tease” you with a low fixed intro rate, but you will have to actually compare the rates after that intro time expires. Check to see if there is a minimum draw you have to take and make sure if there are extra fees like early term cancellation or annual maintenance.

A HELOC is generally available when your equity reaches 75% to 80% of your homes current appraised value. There are variable and fixed interest rates, however you will be paying higher fees for the predictability of a fixed rate. Settlement costs do vary, also something you should ask when comparing lenders.

A HELOC is insurance for unexpected expenses because you only draw when you need it. But it may not be the only option. And be careful, you want become upside down – owing more than your home is worth.