A HELOC or home equity line of credit is a loan secured against a home in which the borrower can access a specified amount of cash over a specified time period. The cash is not offered as a lump sum, rather the borrower can access it whenever required, as much as needed. It works like a revolving loan with a fluctuating interest rate, varying on the basis of the prime rate.

The payments towards a HELOC are like any other loan, meaning a fixed amount has to be paid towards principal and interest each month. You can also consider a balloon payment, where the interest payments are made each month while the principal amount has to be repaid in a lump-sum at the end of the loan term. You can go for a HELOC in the following scenarios.

Consolidation of debt

Mounting high interest credit card debts become difficult to manage after a point. One way to pay off the debt on your cards is to consolidate all of them into a single debt by taking out a home equity line of credit, which will be available at a far lesser rate than those on you cards. This way you only need to make a single monthly payment, far more manageable than paying multiple bills to multiple lenders. You can also pay off all your outstanding medical bills, car bills and unsecured loans, if you have any.

Home improvements

Improvements to your home add to its value, fetching you a good resale price should you decide to put up your house for sale in the future. Some of the popular home improvements include kitchen remodeling, backyard landscaping, converting the garage into a sports room or making the house more environment-friendly by adding solar panels etc. With a home equity line of credit, you can tap into your home’s equity any time you desire and carry out all the home improvements you want.

Education

The importance of higher education cannot be emphasized enough. But putting your son or daughter through college is a much more expensive proposition than it was twenty years ago. Costs of tuition, books, boarding and all associated fees add up to a hefty amount. It is not a surprise then that students prefer to take out student loans to finance their education. Another way to pay for college bills is to take out a HELOC and pay for annual tuition fees. Since the HELOC offers a line of credit, you can access the cash during the end of each study semester to cover all the necessary study bills.

Emergency situations

An unforeseen financial emergency can turn your life topsy-turvy. Imagine your rainy-day funds are exhausted and your poor credit score has led to a loan rejection by your local bank. In such a scenario, your home is the only source of wealth that you can tap into. A reduction in salary, job loss or a rough patch if you are self-employed, can be managed more effectively by tapping into you home’s equity and accessing cash immediately.

There is no doubt that a home equity line of credit can be very helpful in a financial crunch as well as give you the opportunity to improve the value of your home. But make sure that you have valid reasons to take out such a loan as you are putting your most valuable asset, your home, at risk.

Author Bio: For more information on second mortgages or equity loan Canada, contact Canadian Mortgages Inc.

Category: Finances
Keywords: home equity loan, debt consolidation, HELOC