Many people are turning to their homes these days to tap into a resource they have worked hard to get: equity. They are looking to Home Equity Loans and Home Equity Lines of Credit to solve their financial problems.

Let me first explain how each of the two products work: a Home Equity Loan (also called a HELOAN) and a Home Equity Line of Credit (also called a HELOC). Both of these products are using your home as collateral, so to obtain one you have to own your home and have some equity available as well. There are benefits of both, but also each has drawbacks. Personally I believe that you must make the decision on which one (if any) is a good idea for you to do.

The Home Equity Loan is a FIXED amount of money borrowed for a FIXED interest rate over a FIXED amount of time. The payments each month include both principle and interest. This would be a good choice for someone who knows exactly how much money they need to borrow and for how long they’d like to make the payments.

Obviously the longer the term of the loan, the lower the monthly payment will be, but also the more interest that will be tacked on. Of course, you should have the option to make principal only payments if you are able so you can wipe out the debt faster. This option is usually great for people trying to consolidate credit card debt, auto loan debt, or other unsecured debt. Terms are generally anywhere from 3 to 30 years, and most likely you’ll be able to write the interest off on your taxes.

A Home Equity Line of Credit is just what it sounds like: it is a line of credit using your home’s equity, it is a FIXED limit, but a VARIABLE rate that is usually prime based, and generally is interest payments only.

A Home Equity Line of credit is a wonderful product for someone to have that is on top of their finances; generally I wouldn’t recommend this to someone who has a ton of credit card debt because this is pretty much like a huge credit card, only it’s tied to your home. If you don’t make the payment, you can lose your home. Think wisely when you are doing a loan with your home as collateral. The Home Equity line of credit’s minimum payments can be interest only, which is great in that the minimum payment is generally pretty low, but for people who don’t understand this, it can be a night mare. They could go paying the minimum payment forever if they don’t realize they are not touching principle with the payment.

Also, as you pay down your equity line, you have more credit available to you, so again, that’s why it’s not good for someone who is not diligent in spending more than they make. Some home equity lines of credit have the option to lock in a rate on the line of credit. For example, you go buy a $15,000 car and want to finance it on your line of credit. You want to lock it in for X years at X interest rate on your line of credit. When you do this, you will be making payments towards principle and interest and knocking that out faster than if you were making interest only payments. Generally the interest you pay on the home equity line of credit is tax deductible.

I truly believe both of these can be a great asset to a homeowner; however, I also believe they can be devastating to some people. Make sure you know the ins and outs of any lending product you are getting into when you are talking to your lender. If they don’t know the answers or you aren’t trusting them, then take your business elsewhere. A smart borrower is a happy borrower!

Posted under Economy, Loans, Pay Off Debt