A Home Equity Line of Credit Can Help Cover Major Expenses

by Joe Taylor, Jr.
CMR Columnist

Even though the payments on your home mortgage haven't changed, your house has probably grown in value over the last few years. Especially if you live in a California market where home prices have soared, you probably have more home equity than you think.

Using Your Home's Equity

You can use that extra home value to help with large expenses. Many lenders offer home equity lines of credit, a kind of cash advance against your house that you can access as needed, like a credit card. Depending on where you live, where you work, and whether you pay your bills on time, a lender could offer you up to 80% of your home's value as a home equity line of credit (HELOC).

Financial experts recommend using home equity lines of credit for major expenses like college tuition, medical bills, and home improvements. And now you can access home equity lines of credit easily through HELOC convenience checks and credit cards.

Understanding Risks and Rewards of Home Equity Lines of Credit

Like all home loans, a HELOC carries some risk. The collateral for a home equity line of credit is your house. If you get into financial trouble with your HELOC, be sure to communicate any problems to your lender as early as possible--banks don't enjoy foreclosing on homes, even in hot real estate markets.

Home equity lines of credit also come with many closing costs associated with buying a house, such as application fees and a required appraisal of your home's value. Unlike standard second mortgages, home equity lines of credit usually carry variable interest rates.

In this competitive market, some lenders offer extremely low rates that only fluctuate with the Prime Rate. Because you only pay interest on money you have borrowed, you can set up a home equity line of credit now and save it for a future rainy day.

Sources
Union Bank of California
The Federal Reserve Board

About the Author
Joe Taylor Jr. has covered business and finance news for Financial Times Television and CNBC. He coaches beginning mortgage brokers to provide better customer service and to understand creative financing opportunities.

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