How to Use a Home Equity Line of Credit

By Amber Keefer

  • Overview

    Make the most of what your home is worth. Homeowners build equity in their homes as they pay on the principal of the home mortgage. Homeowners also build equity over time, as the home appreciates in value. While some lenders may allow a consumer to borrow up to 100% of a home's equity, many approve loans for 75% to 80% of the amount. While you can borrow against the equity in your home for many different reasons, because your home is being used as collateral to secure the loan, you should use the money wisely and get the best value for every dollar.
    • Step 1

      Consolidate debt. Credit card debt generally carries high interest rates with monthly card payments often barely touching the actual balance. Unlike credit card payments where a substantial portion of the payment each month goes toward paying interest, with a home equity loan, you will be paying less interest, allowing you to pay off the debt faster. Pay off your creditors and have only one monthly payment. Besides paying back less interest, the interest that you pay on a home equity loan may even be tax deductible.
    • Step 2

      Make home improvements. Financing renovations with a home equity loan can be a smart move. According to the National Association of Realtors, every dollar you spend making improvements can add to a home's value. Despite changing market conditions, home improvements are still considered to be a good value for the money.
    • Step 3

      Finance the start up costs for a small business. Small business loans are not always easy to get; therefore, a home equity loan is one way to get the cash you may need. Lenders advise that since you are securing the loan with your home, home equity should be used only in combination with other financing alternatives.
    • Step 4

      Pay off student loan debt. Refinance your student loans with a home equity loan and get a lower interest rate. A loan secured with an asset typically offers lower interest, and unlike private student loans, which tend to offer variable interest rates, home equity loans are generally available at a fixed rate of interest. Borrowers may qualify for better tax breaks as well.
    • Step 5

      Refinance a timeshare. You should be able to get a home equity loan for at least half the interest you now pay to a timeshare developer. Use the money you take out on the equity of your primary residence to pay off the timeshare loan. Pay back less in interest on your vacation home and save money in the long run.
    • Skill: Moderate
    • Tip: Consider whether your best option is a home equity loan or a home equity line of credit. If you take out a loan, you borrow a lump sum of money at a fixed rate of interest. With a home equity loan you need to get a second mortgage on your home, whereas a home equity line of credit allows you to take cash advances up to your credit limit. Interest rates are usually adjustable, but you have the convenience of accessing cash by using a debit or credit card.
    • Tip: To calculate the amount of equity in your home, subtract the remaining balance of the mortgage from the home's current market value.
    • Tip: Before paying off a debt, contact the creditor or lender to inform the company of your intent to pay off any remaining balance. Ask what the payoff balance will be.

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