How Do Line of Credit Home Loans Work?
A line of credit home loan, also known as an equity loan or revolving credit line, is a revolving account, which means that as you pay the balance down, the money is then available for use again. Line of credit home loans are similar to credit cards. The lender will grant you a credit limit based on the amount of available equity in your home, and the funds are secured using the home as collateral. When you need money, you can draw cash against the credit limit by writing a cheque or using a special debit card issued by the lender. You do not have to borrow the entire line of credit at once, but can instead withdraw only the money you need at any given time.
Funds from a line of credit home loan can be used in any way you wish.
You can use the money to purchase property, make personal loans, invest in stocks or shares, complete home repairs or renovations, take a vacation, pay for a child's education, or consolidate other debts. Some borrowers use line of credit home loans as a means to grow their wealth. Rather than allowing their equity to sit dormant, they draw against the equity in the property using a line of credit home loan, and make investments that earn a higher return than the interest rate assigned to the loan. The line of credit home loan is secured using the borrower's home as collateral; however, so a default in payment on the loan can result in a foreclosure on the property.
Line of credit home loans are ideal for situations where you don't know exactly how much money you will need beforehand. Line of credit loans give you the flexibility to borrow only the exact amount of money you need, as you need it.
A line of credit home loan is repaid through monthly installments. Borrowers can repay the line of credit in full, or pay a minimum payment each month. As you repay the loan, funds are then available for use again.
Most line of credit home loans have variable interest rates. These rates are generally higher than the rates assigned to standard variable home loans. It is possible to get a line of credit home loan with a fixed rate; however, it is harder to get a fixed rate on a line of credit home loan than on a traditional home loan.
Borrowers typically pay interest on only the funds that are currently being used.
Pros and Cons of Line of Credit Home Loans
Line of credit home loans offers many advantages to borrowers; however, there are factors that must be taken into consideration before taking out this type of loan.
Benefits of Line of Credit Home Loans:
- Borrowers have easy access to funds. They can withdraw cash using special cheques or debit cards issued by the lender.
- Borrowers may withdraw funds (up to their assigned credit limit) without having to get pre-approval, once the line of credit home loan has been issued.
- Line of credit home loans generally offer higher credit limits than credit cards.
- Line of credit home loans usually have lower interest rates than credit cards
- Borrowers can consolidate debts such as credit card and car loans into their line of credit home loan and make only one monthly payment.
- Line of credit home loans ensure that borrowers will have access to funding in the event of an emergency.
- As the borrower repays the line of credit home loan, the funds are then available for use again.
- Borrowers only pay interest on the funds they are using, rather than on the total amount of money available.
Disadvantages of Line of Credit Home Loans
- Line of credit home loans require borrowers to have good budgeting skills and exercise discipline to stay within their credit limits and avoid extending themselves beyond their means.
- A line of credit home loan is secured using the borrower's home as collateral. Therefore, if the borrower defaults on the line of credit, he risks losing his home to foreclosure.
- Line of credit home loans have variable interest rates, so the borrower is subject to interest rate increases.
Line of credit home loans allow borrowers to access the equity in their home to make other purchases, investments, or pay off debt. These loans give borrowers the flexibility to borrow only the money they need, at the time they need it, without any hassles or delay. However, because the funds are secured using the borrowers home as collateral, borrowers must exercise caution and financial discipline to stay current with the loan or risk facing foreclosure.
What to do next
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