Going into debt to pay for holiday gifts and entertainment is never a good idea. With careful budgeting and smart shopping, you shouldn’t be left struggling to pay off the balance on your credit cards. But if you do end up over your head, there’s an alternative to being stuck with high-interest credit card payments. A home equity line of credit (HELOC) can provide you with funds at a much lower interest rate.
A HELOC is a revolving loan secured against the value of your home. By using your home as collateral, it enables you to borrow funds at a much lower rate of interest than that charged by credit card companies.
How much you can borrow depends on your amount of equity. A HELOC will enable you to borrow up to 125 percent of the value of your home less any existing mortgages. You simply multiply your home’s value by 125 percent and subtract the amount you still on your mortgage.
Your savings can be 50 percent or more. With a HELOC, you can expect to pay less than half the interest charges, over a one-year period, than you would have to pay carrying the same amount of debt on credit cards.
Paying less in interest charges means you can pay off your debt faster. You’ll have more money each month to pay down the principal. If you can afford to make only the minimum payments on your credit card bills, most of what you are paying is interest.
The interest on a HELOC can usually be deducted from your taxes. Provided the total debt isn’t more than the fair market value of your home, up to $100,000 usually qualifies as a tax deduction. Consult a tax advisor to find out how this may apply to you.
A HELOC consolidates your debt so you won’t forget. When you have many credit card bills to pay, it’s a lot easier to fall behind. A HELOC enables you to pay off all your credit cards. You’re left with simple monthly payments to just one lender.
When shopping for a HELOC, read the credit agreements carefully. The annual percentage rates quoted won’t include any set-up fees, so be sure to compare these costs among lenders.
Provided you use a HELOC cautiously, it can be a great way to deal with debt. Just be sure to repay it as soon as possible and don’t be tempted to borrow more than you need, just because you’ve been granted a generous credit limit.
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