The dos and don'ts of home equity line of credit | Column

There are a lot of banks advertising enticing home equity line-of-credit rates, especially in this lower interest rate environment. It can be tempting to borrow against the equity in your home for that special vacation or a fancy new car. But be mindful of the consequences before you take on the additional debt of an equity line.

If you are taking out a home equity line of credit (or loan), there are a number of steps you can take to protect yourself. First and foremost, don’t agree to a home equity line if you don’t have enough income to make the monthly payments. Overextending yourself financially is always a mistake, usually takes a long time to recover from and can ultimately harm your overall credit score.

Next, don’t borrow more than your home is worth. This has been a prevalent problem in today’s shrinking real estate markets. Home values are decreasing and homeowners may have been provided inflated home valuations at the time of purchase. A full and current appraisal will give you a glimpse at what your home is really worth.

Also, don’t sign any document unless you have read and completely understand the contents – especially the interest rates. Home equity lines usually involve variable rates for a limited time so make sure you understand what your rate could ultimately adjust to. If the rate increases, so does your payment. And, based on your credit score, you may receive a different rate than the rate advertised.

Make sure the interest rate is clearly stated in the loan documents and you understand any closing costs and the actual monthly payments. Your lender has the ability to completely explain how the product works and you should take advantage of that consultative process.

On the positive side of the equity equation, a home equity line can provide a low-cost way to fund home improvements. It’s often hard to pin down the exact cost of a remodeling project so a line of credit allows you to draw only the amount you need as you need it. Most lenders offer a variety of ways to draw on your line including checks and electronic transfers into a bank account.

A line of credit can also help you consolidate high cost debt. Paying off those credit cards with a lower interest rate will put you ahead of the game. In most cases, the interest paid is tax deductible, which effectively reduces the cost of borrowing the funds and offers an attractive tax incentive over traditional credit card debt. Make sure you check with your tax advisor or attorney on tax deductibility.

This column is provided by American Marine Bank. Contact the Kingston branch of American Marine Bank at (360) 297-1711.

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