Appreciation rates for real estate have been phenomenal in many parts of the country for the last five years. This creation of massive amounts of equity has lead to interest in home equity loans.
Home Equity Lines of Credit – Be Careful
A home equity line of credit provides a homeowner with the liquid equivalent of a hard asset. Real estate has returned excellent rates of appreciation recently. This means the value of homes has risen, creating new wealth for homeowners. The problem, of course, is the wealth is locked into the home and difficult to use. After all, you cannot use a door to pay the bills. To answer this dilemma, lenders have come up with home equity lines of credit.
A home equity line of credit is exactly what it claims to be. Programs vary, but a lender essentially issues you a credit line roughly equal to the equity you have in your home. If you have $100,000 in equity, you get a $100,000 line you can write checks off of and so on. On top of this, the equity line is usually issued with very reasonable interest rates at or just above traditional mortgages. Throw in the ability to claim a tax deduction on the interest paid, and the popularity of home equity lines of credit becomes clear.
Americans are infamous for abusing credit cards. Most Americans carry thousands upon thousands of dollars in credit card debt. If you are not careful, credit card debt can lead to financial disaster. Interest rates on cards are astronomical. Monthly payments are so low that you never really make much headway on the debt if you don’t have the discipline to pay more than the stated amount. Inevitably, a person’s credit card balances will just continue to grow and grow.
A very high percentage of people use their home equity lines of credit to pay off credit card balances. This strategy absolutely makes sense. The interest rates are lower on the equity line and interest charged on the equity line is deductible. The decision is really a no brainer with one caveat.
If you transfer the thousands of dollars in credit card debt to an equity line, you must be careful. Just because your credit cards are free and clear, you should not consider it a license to go out and start making purchases on them. Doing so can lead to financial ruin where you have used up both the equity line and again have massive credit card debt. If you use an equity line to pay off credit card debt, make sure to cut up your credit cards or hide them somewhere so you do not run up the balances again.
Sergio Haros is with Great Western Mortgage - San Diego mortgage brokers.
