A home equity line of credit (HELOC) is an easy way to gain funds when you need them, but if you mismanage your HELOC you can end up in debt with nothing to show for it. Don't confuse a HELOC with a home equity loan; with a loan you borrow a lump sum and pay it back over a set time period with a fixed interest rate, while a HELOC can be thought of more like a credit card, where you have a certain amount of credit available to be used for a fixed amount of years. Use the following tips to ensure that you manage your HELOC wisely:
Don't Use Your HELOC for Frivolous Purchases
During the recent housing bubble, many homeowners found the amount of equity in their home skyrocket, and a lot of people immediately applied for a HELOC. Unfortunately, many people used the available funds to purchase things such boats, big televisions, and cars, or to fund gambling or vacations. You are allowed to spend the money from your HELOC any way you wish, but using it frivolously will just put you in to debt with nothing to show for it. A smarter way to use your HELOC is to pay off credit cards that have a high interest rate, or to make improvements to your home that add value and will have a good rate of return on your investment.
Make Sure You Understand How Payments on a HELOC Work
Coming into a large line of credit via a HELOC can be exciting, but it is essential to understand how your payments will work so you can plan and budget accordingly. Typically, you will be required to make small, interest-only payments during the years that the HELOC is open. At the end of the HELOC term, the account will close, and you will be responsible for paying off the principal in a set amount of years. Interest rates fluctuate according to market conditions, but they are typically lower than the interest rates of a home equity loan. If you want to save money on interest, plan on making more than the minimum payment due while the line of credit is open so the principal goes down.
Utilize Home Equity Line of Credit Software
There are many home equity line of credit software programs on the market that can make it incredibly easy to manage your HELOC. These programs automatically audit your HELOC to ensure that the bank's computer does not make any errors; all you have to do is input a few pieces of information from your loan statement, and the software will do the rest. Many line of credit software programs also track interest rates, show how you can pay off your HELOC sooner, and provide a break down of the true cost of your HELOC.
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