Advantages of Home Equity

After years of paying down your mortgage, you’ve built up a significant amount of equity in your home. Instead of using costly credit cards or high¬interest bank lines of credit, you can use that equity to your advantage by tapping into a Home Equity Loan or Line of Credit. You’ll save a considerable amount of money in the process.

Home equity loan:

This is a traditional loan in which a borrower uses built¬up home equity as collateral. Following approval, the homeowner receives a lump¬sum payment and makes fixed monthly payments over a predetermined period of time.

Home equity line of credit:

Like a line of credit, homeowners can draw funds as needed, up to a set limit. Once funds are drawn, the borrower must pay a minimum monthly payment, and can repay the entire amount owing at any time. Unlike a traditional home equity loan, interest is only paid on funds that have already been withdrawn.

Two major uses of home equity¬related financing are home renovations and debt consolidation. Renovations that can potentially boost the value of a home can offset the up¬front borrowing costs. Similarly, using home equity to shift debt from high¬interest credit cards to a much lower¬interest loan can significantly reduce interest payouts and improve overall cash flow.

As with all forms of debt, however, homeowners should always borrow conservatively by staying well within their overall debt limits, and should try to always pay more than the minimum to maximize credit ratings and reduce long¬term interest payments.

A mortgage broker can review your home equity options and compare this borrowing method to other financing alternatives.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.