Home Equity Credit Line is the best and cheapest way to get your own debt consolidation program. All you need is to be a homeowner and willing to have another lien or mortgage on your house. And you must have equity in this house.
Home Equity Credit Line – how it works
Generally you can borrow up to 90% of the value of your house. So if your mortgage is $100,000 and
the home is worth $200,000, you have $100,000 of equity in it and can obtain credit line up to $90,000.
Most lenders offer equity lines with 10 year or 120 month amortization. Payments are interest-only meaning you must pay an interest, but you can pay as much into principal as you can afford. That is entirely up to you. However, in the end of 10 year period you must pay off your line of credit in full. So essentially it is 10 year interest-only balloon payment.
If you do have a balance left in the end, you basically have three choices:
- make cash payment to pay it off
- sell the house and pay it from the proceeds
- take another home equity line of credit to pay off the original one
Home Equity Credit Line benefits
- easy to open, no title fees, appraisal or any other closing costs
- flexibility with interest-only payments
- interest paid is tax deductible - consult your accountant or tax advisor for details
- payment increases are less steep than with a conventional 30 year amortization – see table below
- no prepayment penalty – you can pay it off any time
- small cancellation fee – usually no more than $300 if you close equity line of credit in less than 1 – 2 years
- maintenance fees are minimum and often waived, especially if you maintain balance
Home Equity Credit Line pitfalls
There are not actually too many. You will have a second mortgage on your house which is not a big deal. It will make next refinancing process a little longer but only by a week or so.
You rate will vary every 3 to 6 months depending on the agreement and these days it will likely to go up since the prime rate is going up now. But because most Home Equity Credit Lines are amortized over 120 months instead of common 360, even a full percentage point interest rate hike will mean only a somewhat marginal increase in payment.
If you borrow $100,000 initially at 4%, your full principal and interest payment for a 10 year loan will be $1012.45. You can see the payment increase from the chart below:
| Amount |
Term |
Rate |
Payment |
| 100,000.00 |
10 years |
4.000% |
1,012.45 |
| 100,000.00 |
10 years |
5.000% |
1,060.66 |
| 100,000.00 |
10 years |
6.000% |
1,110.21 |
| 100,000.00 |
10 years |
7.000% |
1,161.08 |
And your interest-only obligatory tax-deductible payment at 4% will be just $333.33.
The biggest danger of having a Home Equity Line of Credit (HELOC) is a lack of financial discipline and wasting monies on things you can live without just perfectly fine. Visit our Become Debt Free page where we do some moralizing about it.
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