Using home equity wisely is important in avoiding financial strain. Borrowing money in any sense can be risky, but when taking out a home equity line of credit there are considerations to take into account before committing yourself. Prior to making this decision, think about what this money is for, types of borrowing, the interest rates and decreasing risky borrowing.

What This Money Is For

If you plan to use your home equity line of credit for renovations that will increase the value of your home then typically this is seen as a wise investment. Projects such as remodeling your kitchen or bathroom will help to add value to your home. If you are looking to borrow money in order to pay your child’s college tuition or consolidate credit card debt, this may also be a wise use of funds. When looking to consolidate existing credit card balances, make sure after paying off your debt you do not start to accrue more. By doing so, you will only be putting yourself into further debt without resolving initial debt.

Types of Borrowing

When looking to borrow money against your home, be sure to research the difference between a home equity line of credit and a home equity loan. Home-equity lines of credit tend to work like credit cards. Typically these lines of credit have variable interest rates. The difficulty with this line of credit is that as you pay it down, it frees up more space for spending which could potentially put you in further debt if you are not careful. If you are unable to control your spending, you might want to look into a home equity loan. This loan is like a regular mortgage or auto loan where you are given a set amount of money and put on a payment plan until the money is repaid in full. Another advantage is having fixed interest rates and payment schedules allowing you to budget appropriately.

Interest Rates

Your credit score is essential in helping you to receive low interest rates and avoid any extra fees. Typically if you have a credit score of 700 or above you will be in good standing to receive the prime interest rate or lower. The higher your score the lower the interest. Be sure when you are working with a lender to thoroughly read over all the material to safeguard yourself from paying unwarranted fees. It is also recommended you research different lenders in efforts to advocate for the best rates possible when taking out a loan of line of credit.

Decreasing Risky Borrowing

The ultimate goal of borrowing is to borrow the least amount of money possible so you will be able to pay it back without causing financial strain. Ideally, leaving about 20% equity in your home between your original mortgage and what you are borrowing will provide a “cushion” in case of an emergency. If you are unable to do this, take time to revisit your needs in efforts to determine if there are other efficient ways to utilize your money.

 

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