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Three Reasons to Choose a Home Equity Line of Credit Over a Typical Credit Card

[Apr 27, 2009.]


1. Save Money on Interest With a Home Equity Loan
For most individuals, typical credit card interest rates can easily top off in the high double digits--sometimes even surpassing the twenty percent barrier. On the other hand, home equity loans typically offer lower interest rates since they are secured by a property. In the case of home equity lines of credit, interest rates are typically based on the prime rate with a specified margin.  Individuals with excellent credit and loan qualifications can obtain interest rates below prime, while those with less than stellar credit can still find interest rates slightly above prime.

As it currently stands, the current prime rate is 3.25%. Although home equity line of credit interest rates are adjustable rate mortgages, 9.5% has been the highest prime rate in 10 years. Compared to average credit card interest rates, individuals can save hundreds of dollars in interest alone every month with a HELOC.

2.  Gain Access To A Much Larger Credit Line With A HELOC
For individuals looking for access to a larger credit line, home equity loans can extend this flexibility to homeowners with enough equity. For typical credit card accounts, there are only a handful of select choices when looking for significantly large credit lines. Typical examples of needing a large credit line include business investments, home improvements, and college tuition for children. With a home equity line of credit, homeowners can decide at closing to draw in full, some, or none of the open ended line of credit.

As an example, let's say Mr. Smith wants to make significant home improvements immediately and pay for his son's college tuition starting next year. If the home improvement was going to cost $10,000 and his son's tuition cost $20,000 a year, he could take out a home equity line of credit with a credit line of $90,000. At closing, he could immediately draw $10,000 for the home improvements and begin working on his home. From that point on, he would now have access to a $80,000 credit line to help pay for his son's tuition of $20,000 per year for the next four years.

3. Enjoy the Tax Benefits of a Home Equity Loan
Depending on the exact usage of a home equity loan, homeowner's can look forward to enjoying the tax benefits of a mortgage. Credit cards on other hand offer no such benefits. Homeowners who use their home equity loan to consolidate debt, fund a business investment, or pay off another loan can deduct interest up to the first $100,000 of the loan. If the home equity loan is used for home improvements or as a down payment for another home, individuals can deduct interest up to the value of the home with a maximum limit of $1 million. Individuals should first consult with a qualified tax professional to review all possible tax benefits and limitations.


About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.

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