Things to Consider before You Take a Home Equity LOC

A home equity LOC (line of credit) is a popular lending tool that is designed to help you tap into your available equity. It is an alternative to a home equity loan but it provides access to the same money. With a home equity LOC, you are presented with a few different options and benefits. If you are considering getting a home equity LOC, there are a few things that you need to consider.

Flexible Account

The unique thing about a home equity line of credit is that it is completely flexible. You set up the line of credit and the lender gives you a predetermined credit line. However, you may not have to take any money at the beginning of the term. You are just given access to the credit line to use as you see fit. As long as you do not exceed the credit line, you are free to continue using it. You can repay some as you desire or you can let the interest accumulate on the balance. With this type of freedom, you have to be much more disciplined than you normally would. With a home equity loan, they give you a certain amount of money upfront and then you make a fixed monthly payment over the life of the loan. With this type of arrangement, you have to monitor yourself and make sure that you don't spend more than you can afford to pay back. 

Draw Period

A home equity line of credit will have a predetermined draw period. This means that during the draw period, you can take out money up to your credit line. This is the period that you are free to use the money as you want. However, once you get to the end of the draw period, you have to pay the money back. Sometimes, you might have to come up with the entire amount at once. If you do not, you could risk default of the line of credit and your house. 

Purpose of the LOC

While it does sound attractive, you need to think about the purpose of the line of credit. Ask yourself if you really need this line of credit or if it is purely a want. If this is something that is not necessary, is it worth risking your house over? While it might not seem like it at the time, your house is actually at risk here. If you default on the line of credit, you can lose your house over it. Therefore, you need to assess your reasoning behind the line of credit before you set it up. For example, if this is to get a home theater system, you might want to reconsider. This line of credit can be a great source of ready funds in an emergency. Do not use your last source of emergency cash on something that is completely unnecessary. Save your home equity until you really need it. 


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