If there’s one good thing to come out of the recession, it’s that more and more families are taking a closer look at their financial habits. Many have discovered ways to spend smarter and save more. From clipping coupons and shopping sales to refinancing their mortgages at a lower interest rate, families are consciously making smarter financial decisions.But it’s not always black or white—spend vs. save. There’s also a shade of gray called debt that can make your financial choices infinitely more confusing. Depending on how debt is managed, it can be healthy or harmful to your overall financial wellbeing.
Debt that involves several high-interest rate credit cards is undeniably detrimental. However, unavoidable or necessary debt like medical expenses, college tuition, or a new car, can be tricky. Depending on a number of factors, these situations can be either healthy or harmful. Luckily for homeowners, home equity products offer smart solutions for even the most troublesome debt.
Definition, please. A home equity loan is a lump sum that is borrowed all at once and paid back over an agreed period of time. A home equity line of credit is revolving credit that allows you to borrow what you need and pay it back, again and again. In both cases, your house serves as collateral. The loan amount of each is determined largely by comparing the value of your home with the remaining balance on your mortgage. Credit scores, debts, and income are also factored. Most home equity loans offer a fixed interest rate, which means you can count on making the same monthly payment for the life of the loan. This makes them a popular option.
It’s a smarter way to pay.Home equity loans and equity lines of credit are best used to finance large, one-time expenses, like cars, home repairs or improvements, and even weddings. But they can also be used to help pay down large recurring or ongoing expenses, like major medical bills or tuition. Often, home equity loans or equity lines of credit offer a smarter way to pay for the kind of big-ticket expenses that you might otherwise be tempted to put on one or more credit cards or finance with many individual loans.
Among today’s historically low interest rates, home equity loans and equity lines of credit still offer two of the lowest rate loan options around. Even the highest equity interest rate will be significantly lower than the double-digit interest rates that most credit cards demand. For many people, a home equity loan or equity line of credit is a way to consolidate high interest rate credit card debt into one, low monthly payment. It’s the first step that a lot of families are taking to rid themselves of their own “toxic” debt.
But it’s not a “lifestyle” loan.One thing to keep in mind about equity loans and equity lines of credit is that they should not be used to justify or fund extravagant lifestyle purchases, like vacations, televisions, boats, or other splurges, that you could not pay for otherwise. Similarly, while equity loans and equity lines of credit offer incredible opportunities to consolidate credit card debt, the underlying behavior of problem spending must also be addressed.
When used responsibly, home equity loans and equity lines of credit are a smart way to pay for many of life’s big expenses. If you’re interested in an equity loan but haven’t been in your home for very long, don’t be discouraged. At Allegacy Federal Credit Union, loans are available for up to 100% of the equity in your home, enabling you to maximize your borrowing power.
To find out if a home equity loan or equity line of credit is right for you or for up-to-date rates and qualification information, visit AllegacyFCU.org or call 336.774.3400 today.