Home Equity Line of Credit: What You Need to Know
But… should you take out a home equity loan? Are there other options?
There are options, and a home equity line of credit (HELOC) can be exactly what you’re looking for.
There are many advantages to a HELOC compared to a private loan or home equity loan.
Here’s what you need to know about this financing option:
A Home Equity Line of Credit is Revolving
When you are approved for a HELOC, you’ll have a line of credit available to you for a specific number of years, which is known as the “draw period.”
After that, you’ll enter into a repayment period.
You are allowed to make payments on the debt during the draw period.
However, when you do, you’ll free that amount up in case you need to re-borrow it for something else.
In essence, your home functions like a credit card for a few years.
This can be very helpful because you often don’t know exactly how much additional funding you’ll need – especially after the freshman year.
Having a line of credit available gives you tremendous flexibility.
Using a Home Equity Line of Credit to Pay for College Avoids Loans
Of course, a home equity line of credit is debt.
But it isn’t a one-time lump sum payout loan.
If you use a home equity loan to pay for school, you get all the money at once and have to figure out how to store and ration it over the college years.
Private student loans can be even trickier, with most lenders requiring you to take out a new loan every year.
Unfortunately that means that in year three, with two years of lending on your credit report, you won’t get the favorable rate you may have grabbed in year one.
You’ll also end up with multiple payments during the repayment period.
A home equity line of credit allows you to cover all the years of college at once, even if you don’t know how much you’ll need.
The interest rate will be based on your credit at the beginning of the journey, not your credit once you have a few years of debt added on.
Best of all, you only use (and thus repay) what you actually need.
There’s no, “Well, we borrowed it anyway, might as well use it up,” which then gets repaid with interest in the future.
Use Caution: Your Home is On the Line
While a HELOC has many benefits, it has to be used with caution, like all other debt.
In particular, if you struggle to repay your home equity line of credit, you could lose your home.
This is a devastating consequence, so it’s vital to use only what you need and can afford.
You will have longer to repay a HELOC than you will most private loans, and you’ll pay less interest as well since you’ll only borrow what you need over time.
As a result, it can be more manageable.
But it’s important not to get carried away and use more than you can afford.
Keeping school affordable is an important part of the college funding process.
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