What is equity line of credit? How does it work? Is it beneficial?

Question

I am a first time homeowner and my friend always encourage me to apply for an equity line of credit. Can somebody help me?

Answer 1

HELOCs are perhaps the most flexible and inexpensive way to leverage your equity. The way it works is simple- it is a line of credit, not unlike a credit card or revolving account, that is tied to the equity in your home for a specific amount that you can borrow against, repay, and borrow again for a period of 10 years. At the end of 10 years, if there is a balance, you have 15-20 years to repay it. If there is no balance, the line is closed. In the initial period, you can borrow and repay an unlimited number of times.

You have everything to gain and nothing to lose with a HELOC, because if you do not borrow against it, your payment is nothing. Moreover, unless your credit is poor, the interest is usually pinned to the prime rate, which is quite low. I would view it as rainy day money if you do not draw upon it, and a good way of converting higher interest consumer debt into a far lower payment with interest you can deduct.

We have 2 HELOCs on different properties and they have worked out quite well.

Answer 2

An equity line of credit is when you already own a home. Say you bought you home for 100k and it is now worth 150k. you can take out a line of credit on the 50k. But it is good to keep 20% equity in your home at all times. You do not pay interest on this credit until you use the line of credit. They are good and bad. Be sure to have your local REALTOR do a comparative market analysis before you take the line. A mortgage appraisal and market value can be too different things at the moment. Deciding weather or not to take out a line of credit depends on your goals and what you are trying to achieve by doing this.

Answer 3

depends on what your financial situation is. First instinct is bad idea. a HELOC is basically a loan you can get based on value in your home and it will probably NOT have a good interest rate.  if you are taking it out to pay for other debts already incurred on credit cards or such, then I would definitely say No because then you will just get back into debt when you start using those cards again AND you will still have that HELOC to pay off. All in all, BAD IDEA.