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Should You Take Advantage of Your Home's Equity?

Aug 17, 2007
One of the great things about owning a home is the equity you build into over time. It's money you can't easily touch, but when you really need it, it's there.

Many homeowners will at one time or another consider getting a home equity loan. These are most commonly used for home improvements, as homeowners reach a point where they want to improve the place they live. But you have to be careful when you do so.

The two possible types you have to consider are the standard home equity loan and the home equity line of credit. You have to choose between them depending on your needs.

A home equity loan gives you all the money at once. This can be nice if you want to pay for your remodel job all at once, but it doesn't leave you quite so much flexibility, and you start paying interest right away.

Choosing a home equity loan means you will want to know how much money you will need. The interest rates will be lower than you would pay if you put the same on most credit cards, of course, but if you aren't paying for the entire job up front you'll be paying interest on money you aren't really taking advantage of yet.

A home equity line of credit gives you more flexibility, as you can pay out money as you need to, and only pay interest on what you have used so far. That can be useful in many circumstances.

In addition, many are interest-only loans, which mean lower monthly payments. However, that also means you have to make a balloon payment at the end, and that can be challenging for most people. The interest rate will probably be variable, rather than fixed, but once again likely still lower than your credit cards would charge.

There is another situation, however, in which people decide to use their home equity. Some people like to use it to consolidate their credit card debts when these get too high. Unfortunately, for many this turns out to be a really bad idea.

The trouble with this idea is that it doesn't generally address the problem that caused high credit card bills in the first place. And with the cards paid off, many people charge them right back up again. Soon they can't make those payments or the payments on their home equity loans and they're in trouble. At risk of losing their home.

In this situation, it is far smarter to figure out how to address the spending issues before touching your home equity. You have to commit yourself to living within your means, or you risk losing too much.

In the right situation, however, a home equity loan can help you to do wonderful things, whether it's to fix up your home or to fix up your finances. But if you aren't careful it can destroy all you've worked for and cost you your home.
About the Author
Stephanie Foster blogs at http://credit-blog.findcreditonline.com/ about using your credit wisely. You may be able to find the right home loan for your needs at her site.
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