Planning for a Home Equity Line of Credit Loan

Home equity line of credit loans are some of the most flexible loans available. They provide access to a valued source of funds that can be used for a number of different things and can be easily accessed. While a line of credit is very attractive, if you do not plan out how you will use it, you could find yourself in financial trouble. Here are a few things that you will want to think about before you sign up for a home equity line of credit.

Plan Uses 

When you sign up for a home equity line of credit, you usually have an idea of how you would like to use the money; it is usually this idea that drives you to get the loan in the first place. However, somewhere along the way people have a tendency to use part of the money for other things. You might have an idea for $5000 of the money, but after that, you just have this available credit sitting there. During that time you get a few more ideas of things that you would like to buy. Before you know it, you have a home theater system, a hot tub, or something else that you did not plan on buying initially. Now your home equity line of credit is maxed out and you no longer have any funds there for the future. 

Start planning what you are going to do with the money before you get it. Once you spend the money that you planned on spending, stop using the HELOC. You might even ask them to lower the available credit if you are afraid that you will spend it. You have worked hard to build up your home equity. You do not want to spend it all on unnecessary things. 

Plan for Repayment

During the first part of the loan, the HELOC has what is referred to as a draw period. This is when you are free to take as much money out as you want without exceeding the credit limit. Once you get past the draw period, you are expected to pay back what you borrowed with interest. If you have not planned ahead to pay back this money, it can blindside you. Usually, the term of the draw period is for ten years. After the tenth year, your loan will become a fully amortized loan that must be paid back.

Start planning to repay the money even while you are in the draw period. Start arranging your affairs so that you can afford an extra monthly payment. If you can get enough money together to pay off the home equity line of credit completely, this would be the best. However, if you can only make the monthly payment, that will work as well. Paying down the balance as soon as you get some extra money is a good idea. 

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