With interest rates as low as they are, home equity lines of credit have become very popular. With the Federal Reserve Board hiking interest rates up, there hasn't been a better time to lock in a low interest rate home equity line of credit while interest rates are still low. Locking in a low rate home equity line of credit today won't be the same as it was a year ago when rates stood at a 40-year low, but home equity line of credit seekers are still getting a very attractive rate. As the economy continues to grow, the interest rates will continue to go up.
A home equity line of credit works like any other line of credit. You are given an amount you can borrow and you draw money from the account as you need it or want it. The money is easily accessed usually by a specially issued credit card or other means. The great thing about a home equity line of credit is you only pay interest on the amount you actually use. Home equity lines of credit usually have a low variable interest rate, but sometimes you can find a good fixed interest rate. Your home serves as collateral on an home equity line of credit and should really only be used for major items such as education, home improvements, or medical bills and not for day-to-day expenses. As with anything else, when you use your home as collateral, if you default you can lose your home.
A home equity line of credit is 'revolving' which means you can borrow money, pay off the borrowed money and then borrow that money again, much like a credit card but at a lower interest rate. For example lets say you had a $15,000 home equity line of credit and you borrow $1,000 at the varible interest rate assigned to your line of credit. This would lower your home equity line of credit to $14,000. Then lets say you pay back $500 towards the principal, you have a $14,500 line of credit again. The process is very similar to a regular credit card but since you use your house as collateral, this poses as less risk to a lender so this lower risk is passed on to you in the form of a lower interest rate.
There are advantages of a home equity line of credit. One major advantage is that the interest that you pay on your home equity loan may be tax deductible because the debt is secured by your home. For more information about your interest being tax deductible you will want to consult a tax advisor. They will be able to tell you if your interest is tax deductible.
Something that you should watch out for while looking or applying for a home equity line of credit is to make sure you get a fixed interest rate. Some home equity line of credits offer an initial variable rate, but after a certain period they may let you roll over your account to be in the fixed rate interest option. A lot of lenders want to give you a home equity line of credit that has a low variable interest rate. With there being talks of more interest rate hike I would be looking for a equity line of credit that has a fixed interest rate even if the fixed rate has a little higher interest rate, especially if you are going to have the line of credit with a balance on it for an extended amount of time. Interest rates might be really low right now but if you have a variable interest rate, when the interest rate goes up you may be stuck with a line of credit that has a higher interest rate than you wanted.
In short, it is very important to stay informed about mortgage rates at all times. By getting a low interest rate you can save thousands of dollars in interest over the life of the loan. So whether you have perfect credit or less than perfect credit, or if you are self employed or have a full time job, there are a lot of lenders that will compete for your business. Remember when lender compete you will win and always make sure that you are using a reputable mortgage company.
