Home Equity Advice & Articles
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Using home equity to smooth your income

January 07, 2008

Do you have ups and downs in your income? This is a common problem for people who are self-employed, whose work has seasonal highs and lows, and those who are compensated partly through salary, partly through annual bonuses.

A home equity line of credit (HELOC) can help you cover temporary shortfalls in your cash flow. You can set up a low-cost revolving line of credit with the bank, using the equity in your home as collateral.

As you need money to pay bills and other expenses, you draw on the line of credit. You repay the money you borrow when your bonus or your busy season arrives. In the meantime, you pay for the use of the money in the same way you repay credit card debts – with a set minimum amount every month. But the interest will amount to a lot less than the rate you’d pay if you were using credit cards to smooth out bumps in your cash flow.

You may be eligible to borrow 75 percent or more of your home’s value with a home equity line of credit, minus what you owe on your mortgage.

What will a home equity line of credit cost you? In addition to interest, you usually have to pay a fee to open up this type of loan, plus application charges and fees for a home appraisal, a title search on your home and other legal services.

In addition, some institutions charge:

  • transaction fees every time you borrow money
  • annual fees
  • inactivity fees if you don’t use your account for a certain amount of time
  • closing costs

 

Pros and cons of HELOCs

Pros

Cons

You can spend as frequently as you require, up to the limit of your line of credit. You only pay interest on the money you spend. You may have to use minimum or maximum amounts of money every time you draw on your line of credit.
Some or all of your interest could be tax-deductible. Check with a financial advisor. When you sell your home, you will have to pay off your line in full.
Most financial institutions charge a variable rate of interest for home equity loans. This type of interest goes up and down with the market rate, so your rate may go lower, or higher. It will usually be below the current market rate for most other types of consumer credit, however. After a year or other set period, such as 10 years, you may have to renegotiate your line, repay your full outstanding line or set up a repayment schedule.

Some lenders put all of your payments toward the interest, while others divide your payments between the interest and the principal. Your best option is to make sure every payment includes some money toward the principal, so you are paying down your debt as well as servicing it.

Your best strategies? Shop around for the best deal, and be conservative about how you use your line of credit. It may give you access to thousands of dollars, but you’ll have to pay it back one day. So spend only what you need to cover expenses during a cash crunch, then pay it back as quickly as you can.

 

 

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