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Home Equity Line of Credit

As a homeowner, you may have many of your financial assets tied up in your home. And if your home has increased in value during the recent housing boom, you may be counting on those assets to fund future activities such as a retirement home or a child’s college education.

You may have gotten offers in the mail for a home equity line of credit. A home equity line of credit is based on the equity you have in your home—in other words, the portion of your home’s value that is not owed to a bank or mortgage lender.

There are a few good reasons for taking out a home equity line of credit.

One reason is that you may want to undertake an expensive home improvement task, such as remodeling your kitchen. A home equity line of credit is generally a much more cost-effective way to pay for this than using a credit card, and some renovation costs can be recouped when you sell your home. You will probably not regain 100% of the money you spent on a kitchen renovation (especially when you consider even the moderate interest charged on a home equity line of credit). However, you may regain some or most of it back, and the right renovation can move your house faster on a competitive real estate market.

If you have substantial equity in your home but also have substantial credit card debt, it can be useful to take out a home equity line of credit in order to pay off your credit card bills, since typically credit cards have much higher interest rates than a home equity line of credit.

However, if you already have lots of credit card debt and you are thinking of taking out a home equity line of credit to finance a large purchase such as a boat or RV, think again. Your home is probably your biggest asset, and, after all, it’s where you live; don’t jeopardize that by getting in over your head.

Similarly, if you are paying for a child’s college education, and you are counting on home equity to fund a large part of your retirement, you should think twice about a home equity line of credit to pay for college. It is advised that when choosing between retirement and a child’s college education to choose retirement; that way, your child will pay student loans rather than elder care expenses.

Regardless of your needs, think carefully before taking out a home equity line of credit, and be sure you use it for a purpose that will save you money in the long run.

When seeking a home equity line of credit, you should be able to get a fairly low interest rate, especially if you have a lot of equity built up. Shop around to get the best possible deal. Ask the hard questions. For whatever project you are planning to spend it on, think carefully to get your money’s worth; after all, you are paying for it.

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