5 Tips for Savvy Use of Your Home Equity Line of CreditWritten by Tim Paul
Tapping your home's equity to pay college expenses, consolidate credit card debt or even to buy a new car or boat is common place. Many economists attribute additional buying power afforded consumers through home equity debt as a primary reason nation's economy has been able to emerge from recent recession. Yet, aside from simply allowing consumers to spendmore, flexibility and efficiency of a home equity line of credit (HELOC) can provide financially savvy person with means to savemoney, make money or simply take advantageof opportune situations he or she might otherwise miss out on. Here are five tips to show you how:Tip 1: Take Advantage of Higher Insurance Deductibles! You probably know that raising deductibles on auto and homeowners insurance policies can mean big savings on insurance premiums. If you increase deductible on a homeowner's policy from $500 to $1,000, you'll cut your premium by as much as 25%! Yet many people don't do this because they fear they may not have necessary cash available in event of a loss. With low-interest cash readily available through a home equity line of credit you'll have security and confidence you need to raise your deductibles and reap savings! Tip 2: Lock In Big Savings! Credit card companies (e.g. GM card) frequently have shopping programs with names like "Main Street Savings" on a 30-day free trial basis. These programs allow you to buy discounted gift cards (20% discount) for major national retailers like Target, Sears, and Home Depot. The flexibility afforded by a home equity line of credit can allow you to purchase (during free trial period) a large amount of discounted gift cards for major retailers you frequent. Then use these cards instead of cash or credit when you purchase everyday items (The cash you would have spent can be used to pay down HELOC). Although you pay low interest on home equity credit line, you receive a front-end discount of 20% on everything bought. When combined with store coupons and sales, you can realize total savings of 70% or more! In short, a HELOC provides low interest cash availability to take advantage of bargains like this that you might otherwise have to pass on. Tip 3: Take Advantage of 0% Balance Transfer Offers! We've all seen no-fee credit card offering "0% APR" on balance transfers for 6, 12, and even 18 months. If you have a balance on your HELOC, you may be able to take advantage of these offers. Here's an example of how: last year I accepted such an offer and promptly transferred $10,000 from my home equity credit line balance (which had a 4.25% rate). Then I cut up card! For next eleven months, I paid monthly minimum credit card payment (3% of outstanding balance) by writing a check from my home equity line of credit. In twelfth month, prior to expiration of 0% offer, I paid off remaining balance with another home equity credit line check. During 12 months, I also made sure to continue my regular payment towards HELOC at same level, meaning that more of each went to pay down principal and less went to interest. Net result: interest savings of over $350.00, lower principal balance on my HELOC, and a positive addition to my credit repayment history!
| | Decision Time: Home Equity Loan or Home Equity Line of Credit?Written by Tim Paul
Home equity loans and home equity lines of credit continue to grow in popularity. According to Consumer Bankers Association, during 2003 combined home equity line and loan portfolios grew 29%, following a torrid 31% growth rate in 2002. With so many people deciding to cash in on their home's equity value, it seems sensible to review factors that should be weighed in choosing between out a home equity loan (HEL) or a home equity line of credit (HELOC). In this article we outline three principal factors to weigh to make decision as objective and rational as possible. But first, definitions:A home equity loan (HEL) is very similar to a regular residential mortgage except that it typically has a shorter term and is in a second (or junior) position behind first mortgage on property - if there is a first mortgage. With a HEL, you receive a lump sum of money at closing and agree to repay it according to a fixed amortization schedule (usually 5, 10 or 15 years). Much like a regular mortgage, typical HEL has a fixed interest rate that is set at closing for life of loan. In contrast, a home equity line of credit (HELOC) in many ways is similar to a credit card. At closing you are assigned a specified credit limit that you can borrow up to - not a check. HELOC funds are borrowed "on demand" and you pay back only what you use plus interest. Depending on how much you use HELOC, you will have a minimum monthly payment requirement (often "interest only"); beyond minimum, it is up to you how much to pay and when to pay. One more important difference: interest rate on a HELOC is adjustable meaning that it can - and almost certainly will - change over time. So, once you've decided that tapping your home's equity is a smart move, how do you decide which route to go? If you take time to honestly assess your situation using following three criteria, you will be able to make a sound and reasoned decision. 1. Certainty or Flexibility: Which do you value most?! For many borrowers, this is most important factor to consider. Your home is collateral for either type of home equity borrowing and, in a worst case scenario, it could be seized and sold to satisfy an outstanding unpaid loan balance. People do remember double-digit interest rates of early 1980's and, for many, mere prospect of interest costs on a variable-rate home equity line of credit rising rapidly beyond their means is reason enough for them to opt for certainty of a fixed rate HEL. From borrower's perspective, "certainty" is main virtue of a fixed-rate home equity loan. You borrow a specific amount of money for a specific period of time at a specific rate of interest. You repay loan in precise monthly installments for a precise number of months. For many, knowing exactly what their future obligations will be is only way they can borrow against equity in their home and still sleep at night. A home equity line of credit, in contrast, is short on certainty but long on virtue of flexibility. With a HELOC you borrow funds on an irregular schedule that meets your needs at adjustable interest rates that can change quickly. Loan repayment is also flexible: you typically are required to make only relatively small "interest-only" monthly payments on a HELOC. However, you have flexibility to make any size payment above interest-only minimum or payoff loan at your will. 2. Do you need money for a one-time, lump-sum payment or will your cash needs be intermittent over several months or years? Home equity loans are best suited for one-time payment needs (a good example is consolidating debt by paying off several high-rate credit cards at one time). This is because at time you close on a HEL, you will be provided with a lump-sum check in amount you've borrowed (less closing costs). While it may be empowering to have that much money handed over to you, be humbled by fact that you will immediately begin incurring interest costs on entire balance.
|
