When you are thinking to fund a remodeling of your home a home equity line of credit is a solution that can be an option. However, before do it, you should analyze carefully every aspect of your decision.
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In fact what is a home equity line of credit?
This line of credit is the revolving credit, where you (the borrower) use the equity in your home that serves as collateral.
It is a difference between a home equity line of credit and home equity loan. Instead of a fixed interest rate home equity line of credit will involve variable interest rates.
How you can qualify
To qualify for a home equity line of credit you should prove you will be able to repay the loan (Loan = Principal +Interest).
The lender will check your credit history, your income and also, your financial obligations and debts.
If you are approved, you can start to borrow up to your credit limit whenever you want, using special checks or maybe a credit card.
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Advantages
1. This type of credit is very useful to pay to finance major expenses such as a home remodeling. However, when you decide apply for this line of credit you should look for a plan which fit you. This line of credit has to meet your particular needs and you should be aware of its conditions and terms such as the annual percentage rate (APR).
2. In fact, this line of credit is similar with a credit card. You don’t have to pay for the entire line of credit, just the sum already borrowed.
3. Another important advantage of using this type of line of credits – they are tax deductible. Combining your mortgage loan with the home equity line of credit you can get a fixed low rate.
4. A great advantage of using the home equity line of credit – you can remodel your house step by step; today you can redo only the kitchen, tomorrow a bathroom and so on.
5. But the greatest advantage is the improvement of your home, its increased value. Practically you can recover your money invested selling the house with a good price.
Disadvantages
1. You should be careful do not over spend. Typically, home equity credit lines have variable interest rates. The best way to control that is to spend and remodel your home step by step. When you finish, for example the bathroom try first to repay your debt and only after that you can borrow again. It’s true that many lenders offer temporarily fixed and discounted interest rates, but only for short time which it cannot help you too much.
2. Sometimes the lenders can cancel the line of credit. That it’s because your house serves as collateral and sometime its market value can decrease, and in this case your debt can reach and even exceed the value of your home.
3. The main disadvantage and the worst scenario is if you are not able to pay back your loan. In this case you can lose your home.
4. When you are selling the house you should pay right away your credit loan.
