Finance Articles

Four Ways A Home Equity Line Of Credit Can Help You Finance Your Next Project

A home equity line of credit can be a great help to you when you are looking for finances for your next project. Whether you have one project in mind - or several, this kind of loan may be the best way to finance it. Here are four ways that a home equity line of credit (HELOC) may be the best way to go.

1. It Has A Lower Interest Rate

A home equity line of credit, even though it is a second mortgage, has an interest rate that it just a little higher than prime rate. This means that it is much lower than a credit card, lower than a personal loan, and may be lower than just about any other kind of loan - except for a first mortgage.

2. Only Pay For What You Use

This kind of loan has another great benefit - while you do pay interest like on any other loan, you are only paying interest on the amount you actually use. This means, that if you are given a draw period of 10 years, and you have only used half of the designated money after five years, that you have saved yourself a lot of money - even though a much larger amount is still at your disposal.

With a regular loan, even with a home equity loan, you will be paying a set amount of interest - whether you use all of the money or not. You have money available for projects if you need it - and if not, why should you pay interest on what you do not need, or use? This kind of loan works especially great if you have several projects in mind, but do not know what the total cost will be - or if you may want to add another project somewhere down the road.

3. Lower Monthly Payments

During the draw period on a home equity line of credit, you will be making low payments each month. This is because you will be paying on the interest only - and interest only on the amount that you have actually used. So, during the draw period, which could be up to about 11 years, you will enjoy very low payments.

You need to be aware, however, that at the end of the draw period, one of two things will happen. You will either need to make a balloon payment for the full amount, which will probably require refinancing, or your fully amortizing payments will become much higher than they were - since your new payments will now include the principal, too.

4. Few Closing Costs

One more reason why a home equity line of credit makes more sense than other loans is because it will have fewer closing costs and other fees. Some lenders charge very few, if any fees, when you take out a HELOC. This means a saving of possibly a couple thousand dollars, depending on how big the loan is.

Before you sign any HELOC agreement, though, be sure that you find out exactly what the margin is on it. This will be a rate of interest that is added to the overall APR, and you usually will not be told about it - unless you ask. Also, get several quotes for your home equity line of credit, look them over, and choose the best one for your needs.

Joe Kenny writes for the UK personal finance site http://www.ukpersonalloanstore.co.uk/ and also for US residents, http://www.rebuild.org/

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