5 Signs a Home Equity Line of Credit Is Right for You

Many people have the need to ask for a home equity line of credit. However, with so many different variables to consider, how can you know if a specific equity line of credit is the right one for you?

1. Know the Basics
Simply put, a home equity line of credit works like most traditional lines of credit and credit cards. The borrower can tap a part of the available credit they have, pay that off, and use that credit again for the term of the credit line, which usually is 10 years. After this period, the unpaid balance that you have will be converted into a loan that should be repaid usually within 10 to 20 years. One of the best advantages of home equity lines of credit compared to the traditional bank loans is the fact that the borrower can deduct the interest payments up to $100,000 against their tax liability.

2. Look at the Interest Rate
The truth is that the terms of the home equity line of credit vary. This is why it is important that you look at the interest rates that are going to be applied to your loan. There are many things that you should know to see if this is a good option for you or not. So, start by finding out the starting interest rate, the length of the draw period, if you need to pay the full credit at the end of the draw period, or in case that you don’t, how much time you have to pay it. Usually, the starting interest rate should be based on the prime rate. However, you should make sure that the lender will cap that same prime rate for the entire life of the loan.

3. You May or May Not Qualify
The reality is that just because you have equity in your home, it doesn’t mean that you’ll get a home equity line of credit. The lenders will probably want to take a look at your income and credit history. So, depending on how much equity you have relative to other mortgages on the property will affect the size of the credit line you may get.

4. Weigh the Risks
You need to make sure that you are well aware of the risks. One of the things that you want to avoid is to rely on a fixed-rate loan to pay the amount that you owe for many years, without even knowing how the interest rate will be at that time.

5. Consider Other Options
When you need the kind of funds that you know you won’t be able to pay within a couple years from now, you should consider opting for a home equity loan instead. This kind of loan usually comes with a fixed interest and principal payment. Plus, some can also tap home equity. So, what this means is that you’re eliminating the risk of a variable interest rate that can go against you.