Home equity lines of credit have become a popular lending tool in the last several years. A home equity line of credit is a revolving form of credit with your house tied in as collateral. When you take out a home equity line of credit, you are given a certain credit limit that you can borrow. You can borrow as much money as you want within your limit during the draw period of the loan. You can make payments at your discretion until the repayment period of the loan comes. While it seems pretty simple, you can run into problems with the account. Here are a few avoidable problems with home equity lines of credit.
1. Not Making Payments
During the draw period, you might not be required to make a monthly payment. You can pay down the balance as you see fit. However, if you are not making payments, the interest is still accruing. Therefore, if you leave the balance there for a long period of time untouched, the interest can add up quickly. You will end up spending a lot more money than you have to in the long run. Paying interest that you don't have to pay is like throwing money away.
2. Racking Up Fees
Some lines of credit have fees for everything. They might have a transaction fee, an inactivity fee, and several other types of fees. If you are wise, you will investigate this aspect of the line of credit before you sign up. You need to know in advance what fees are associated with the account. This can help you save money that you don't have to spend on fees.
3. Withdrawal Rules
Many home equity lines of credit have rules regarding withdrawals. For example, you might have to make a minimum withdrawal every time you take a draw on the money. You might not be able to take money out unless it is more than $400. This should make you plan out your purchases in advance. If you make several purchases and you only needed $100, you can withdraw a lot more money than you need. For each one of those purchases, you just withdrew an extra $300. Now you are paying interest on that money and it gets you in a hole. Another common scenario is when they have a minimum initial disbursement. You might have to take out $2000 on your first distribution. This should make you think before you take out any money.
4. Not Understanding Rules
Ignorance will not shield you from problems with the home equity line of credit. Many people get involved with a home equity line of credit without fully understanding what is expected of them. For example a common draw period is 10 years. You can withdraw money during that time period. Then some home equity lines of credit come due immediately after the 10 years is up. If you have a huge balance at that time, you might be surprised.