Borrowing Against Your Home Requires Discipline

A home equity line of credit can finance everything from college tuition to cars. It also can be a useful cushion if used wisely and with restraint.

For many Americans home equity is the largest component of their nest egg for retirement. As everyone has seen in the last few years, overleveraging this valuable asset for short-term pleasure may rob you of future economic security. 

Understand the risks of accessing your equity line of credit, have a plan for paying back the loan before you borrow the money, and treat the servicing of the debt as you would any encumbrance. Above all, apply strict discipline to your spending habits.

Consider these points:

• Home equity lines of credit have variable interest rates; when rates increase so will your overall debt.
• You can tap a line of credit at will; interest accrues only on the amount borrowed. The best part is any amount you pay off becomes available to borrow again.
• Consider a line of credit if the payback period is three years or less. For payback periods longer than three years, consider a home equity loan for the peace of mind of a fixed rate.
• If you already have a home equity line of credit, don't swap it for a fixed-rate home equity loan until the interest rate gap narrows significantly. Rates on lines of credit still are lower than on home equity loans.
• Rates on lines of credit are usually lower than on a credit card. Also, interest on a line of credit may be deductible on up to $100,000 of home-equity debt if you itemize deductions on your tax return.

Don't let a home equity loan or line of credit give you a false sense of being debt free. Talk to a Credit Union loan officer today for help sorting out your home equity loan options.