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Article: Borrowing Against Your Home Requires Discipline

Discipline is key

A home equity line of credit (HELOC) 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. 

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

  • A HELOC has a variable interest rate, so when rates increase, your overall debt will increase as well.
  • 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 HELOC if the payback period is three years or less. For payback periods longer than three years, consider a home equity loan with a fixed rate.
  • If you already have a HELOC, 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.
  • HELOC rates are usually lower than a credit card, and the interest you pay may be tax deductible. Consult a tax advisor regarding the deductibility of interest.
Check out our HELOC calculator.

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