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What are the pros/cons of a home equity line of credit? |
Bank says I'm eligible but I'm not sure it's prudent. A home-equity line of credit (HELOC) is a cheap way to borrow money, while keeping your payments minimal. Your interest costs are usually around Prime rate, which is the rate banks charge their best customers, and it should be, because they're taking your home as collateral, which is worth more than the loan. Personally, I advise clients to use their HELOC because of the lower interest costs, but to not use it to lower payments, as it doesn't help you out if you're not paying off the debt. A HELOC should never be used for discretionary spending, as it is borrowed money. I would say that if you have the option to obtain a HELOC, that you should enact it, however apply one of these rules: 1) If you are using it to do home renovations, or to purchase a car, set up regular pre-authorized monthly payments, and stick to it the way you would a regular bank loan. 2) If you are consolidating other higher interest debt, keep payments at the same level, otherwise the interest savings will not be realized, because you'll have the debt for longer, and will pay more interest. Source(s): I am a personal banker Make sure you can pay it back, because you are putting your home up for collateral. If the terms are good and you need the money, go for it. people tend to use it to finance things they don't really need to buy. they wind up spreading the cost of a plasma tv over 15 years, which gets very expensive. if you are disciplined, it is a good thing to have as an emergency fund. Try to negotiate the fees down or out. The Pros are the relatively low interest rate and the ability to use it for any purpose. The disadvantage is that your house is at risk and the loan term is long. |
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