HELOC: Being Smart When It Comes To Borrowing Large Amounts of Money

Borrowing money from a bank or other lenders is always an important decision, however, the commitment becomes considerably more serious if you need a large amount of money. Furthermore, in many cases, the risks grow with the rewards, but this is not always the case.

Using the equity in your home as collateral for a loan is usually a better choice than applying for an unsecured one mostly because the former comes with considerably lower interest rates than the latter. Not using the equity in your home is basically like throwing away money.

This having been said, there are several types of debt that are guaranteed using home equity, and some are more useful than others. One of the most popular types of debt, to this day, it the HELOC, or home equity line of credit. Here is what you need to know about it:

Understanding what a HELOC is?

Home equity lines of credit and loans are both guaranteed using the equity in your home as collateral, but each of them offers different degrees of financial flexibility. Where a loan implies borrowing a set amount of money for a certain period of time that must be usually repaid on a monthly basis, a HELOC functions largely the same as a credit card.

Generally speaking, a HELOC allows you to borrow money only when you need it. The credit limit on these agreements is considerably larger than that of credit cards. Furthermore, you can use as much or as little of that given credit whenever you want, just like you would if it were a credit card.

It is important to mention that the limit for the line of credit is usually decided by how much equity you have in your home. In most cases, if creditors look at the value of your home and at how much you owe on your mortgage. For example, if you own a $500,000 home and owe $250,000 on your mortgage, the creditors will decide that you have $250,000 in equity in your home, which will also be the limit for the line of credit.

The advantages and disadvantages of a home equity line of credit

While it may seem risky to borrow money that you guarantee for using your home equity, especially when considering that you also have to still make monthly payments on the mortgage, a good budget plan can turn a HELOC into a very useful tool. Home equity lines of credit can only be risky if you take on too much debt, or if you are not financially stable. Here are the main advantages and disadvantages of a HELOC:

PROS

  • Only pay for what you use – With a HELOC, you only pay interest (monthly) for the amount of money that you use. For example, if you have a $250,000 HELOC, and you use only $20,000, the interest will be calculated on the amount of money that you’ve borrowed. You can repay it by the end of the month and skip having to pay interest;
  • Great for general financial security – Provided that you do have the monthly income to keep the line of credit from becoming too expensive, the HELOC can be great if you ever find yourself needing a larger amount of money ASAP. Borrowing money using the line of credit is as simple as using a credit card and does not require you to first go to meetings at the bank or wait for any approvals;
  • It is really cheap – A HELOC is often considerably cheaper than a regular loan, especially when considering that you only pay interest for what you borrow. If you take out $200-$500 each month and pay them back after 30 days, the interest will be barely noticeable;

CONS

  • It can cause you to overspend – Having so much money at your disposal can give you a false sense of security, which may lead to you spending considerably more than what you normally would. It is possible to reach a point where you either won’t be able to repay the money on time and the interest alone will eat a large chunk of your monthly income;
  • Using a HELOC requires financial planning – While actually having the HELOC at your disposal is extremely affordable, borrowing money while you are unemployed can lead to big problems in the future, as the debt continues to grow. If the economy is unstable, or you do not have a long-term job, even taking small amounts of money every month, from a home equity line of credit can lead a large debt;

Conclusion

Having a HELOC at your disposal is a great way to ensure that you always have funds to fall back on if you need to pay for unforeseen expenses. It can be useful if you need money to send the kids to college, if you want to do some home improvements, or if you need to pay for medical bills or treatments. There is no limitation to what you can do with the money, however, failing to return all of it at the end of the agreement will lead to you losing your home.

Is It A Good Idea To Pay Off Your Student Loans Prior To Buying A House?

One of the best things that follow finishing your college education is getting your own place. In many aspects, it marks the beginning of an individual’s independent life. However, houses are often very expensive, and making the steps necessary to buy one requires a serious long-term commitment and can put you under considerable financial strain. This is especially true for individuals who have not yet paid off their student loans.

While it may seem better to rent until you finish paying off your debt, you will still have to spend money to have a place to live. On the other hand, if you get a house, you will have to make monthly payments for it on top of the ones for your student loan. However, once you finish returning the money that you’ve borrowed, you will have a place of your own, and that you won’t have to pay rent for.

This having been said, things are often more complicated. Buying a house is a big investment and a lot of thought should go into your decision. One of the most important things that you can to figure things out is to look at the situation objectively.

What are the actual advantages of buying a house while still making payments for your student loans?

While the list may seem short, there are actually a lot of advantages to buying a house while still repaying your student debt:

  • Real estate prices constantly rise

The prices of houses and apartments are constantly on the rise, as cities become more crowded. This means that the longer you wait before buying a house, the more money you will have to spend. It is not unreasonable to estimate that the house that you may be able to afford this year may prove to be too expensive.

  • Student loans do not have a large impact on your credit rating

While student loans do show up on your financial records, they do not have a considerable impact on your credit score. Furthermore, they often come with very low interest rates when compared to other types of loans such as payday. This can make it easy to manage both the monthly payments for the loan as well as the mortgage on a house.

  • There are many ways to handle the student loan debt

Additionally, it is important to keep in mind that it is possible to take advantage of a student loan discharge program offered by companies and volunteer organizations. The laws that govern these forgiveness programs are constantly changing and you should always keep an eye out for ways to solve the issue of your student debt as fast as possible.

  • Professionals recommend it

If you can make a down payment on your house, your monthly rates will be smaller, making it easy to manage both your student loan as well as your mortgage. From a financial point of view, specialists claim that owning a home should always be a priority since it offers more personal stability, and can also be used as collateral for future loans.

The disadvantages of buying a house while you are still repaying student loans

The biggest disadvantage is that if your student loan has a variable interest rate, you may end up having to pay considerably more than what you expected when you bought the house. This can make it extremely difficult to pay both the loan and the mortgage, especially as your student debt accrues interest.

It is also worth mentioning that if you do not plan things accordingly, you may end up unable to pay your mortgage, which may lead to you losing your house. If the economy is unstable and a recession catches you with a lot of debt, you will have a lot of difficulties keeping up with all of your monthly expenses.

Lastly, getting a house while also making payments on your student debt will put you under considerable financial stress, which can make it difficult to make other important steps in life, such as having kids. Truth be told, having to pay both the student loan debt and the mortgage will limit the things that you can spend.

Conclusion

Regardless of what you choose to do, always be mindful of what could happen if you lost your job or if you realized that you are expecting a child. Any reduction in income or additional expenses will be more difficult to manage, at least for a couple of years until you finish repaying the student debt.

This having been said, if the economy is stable and you have a long-term job, it may be better to buy a house as soon as possible. This will give you more stability and should be the cheaper course of action, especially if you find an affordable house in a neighborhood where real estate prices are likely to explode.