Use
Your Home Equity Line of Credit Wisely
A home equity line of credit is a loan
you take out against the amount of your mortgage that
you have paid off or the increase in the value of your
home. Home equity lines of credit are relatively easy
to get, have low rates, and their interest is deductible.
The down side is that if you can’t make your payment,
you lose your house.
Your creditor or bank will calculate
your equity by subtracting the amount of your mortgage
from the current value of the house. This leaves the
amount you’ve paid. Take 80% of that and you have the
loan you will probably be offered by most banks.
Example: If your home is valued at $250,000
and your mortgage is $150,000, you have $100,000 equity
in your home. 80% of that is $80,000 and that’s how
much you can borrow.
Whether or not you get this home equity
line of credit has nothing to do with your income,
investments, stock, and your liquid capital, how much
cash you have in your savings account, credit cards,
or credit reference. It has nothing to do with the
financial state of your family, your husband or wife,
or where you work.
Unfortunately, if you fall into debt
or one of your children falls ill and you have no extended
family to rely on for finance, you could lose your
home. A home equity line of credit is essentially a
second mortgage and two mortgages means that you’ve
essentially put up your house as collateral.
It is not a good idea to stake your residence
and family’s funds on a non-essential purchase like
a vacation home or adding on an extra family room or
bathroom for when your mother or father come visit.
There’s no point in making the homestead more homey
if you have nothing more than hope that you will be
able to maintain the payments. It’s an extra immediate
payment every month that you may bleed your assets
dry.
If you are sure that your budget can
handle it, then build the extra bedroom or bath. Extra
rooms raise the value of your estate as well as increase
your general household environment. It may be a better
idea to keep your home equity line of credit as a last
resort safety net instead of gambling on a future that
is nothing if not uncertain.
