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Article: Borrowing Against Your Home Requires Discipline

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 you're not already overloaded with debt. You can set it up, but never draw on it, and have the comfort of knowing it's there if needed.

But, home equity also may be the largest component of many Americans' nest egg for retirement. Over-leveraging your house for short-term pleasure may rob you of future economic security. 

Discipline is key. Understand the risks and have a plan for paying back the loan. Consider these points:

  • Home equity lines of credit have variable interest rates, so when rates increase, your overall debt will too.
  • You can tap a line of credit at will, and interest accrues only on the amount borrowed. 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 that 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 usually are lower than on a credit card, and the interest pay may be tax deductible. Consult a tax advisor regarding the deductibility of interest.

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