Today we went to the bank to talk about refinancing the mortgage on our primary house. We were just gathering information and rates. Like everyone else looking for refinancing, we want the best rate possible. The ways to do is to have excellent credit and to finance only 65% of the house value. At 65%, the bank can give you their best rate and they don’t even have to confirm your income! In other words, if your credit is good and you have 35% down payment, you can walk into a bank for a 65% mortgage and they will give it to you without asking if you make any money! Something to keep in mind for all you people who have a ton of “unreported†income.
While at the bank, the banker offered me a very un-expected option. She recommended I get a home equity line of credit instead of a normal mortgage. An equity line of credit is just like a normal line of credit, only much bigger. Because the credit line is secure by a house, the interest is also very low – prime. The question is why would one take an equity line of credit over a traditional mortgage?
There are a few advantages to refinancing a house with an equity line. The first is flexible payments. Unlike fix term mortgages that have fixed monthly payments, an equity line allows you to pay as little as interest only to as much as paying the entire thing off, all without penalty. Another advantage of the equity line is once you start paying it down; the amount you pay off is available to you to draw on again. So if you pay off $50,000 on the line of credit, you will have $50,000 of available credit to use for whatever purpose you want.
The disadvantage of an equity line of credit is the same as the advantage – once you start paying it down; the amount you pay off is available to you to draw on again. For some people, this availability is just too tempting. However, if you keep drawing from it, you’ll never pay it off. Remember my post about the credit card trap? Well you don’t want to be in a line of credit trap! If you don’t think you’re discipline enough to be able to control yourself when it comes to financial matters, then an equity line of credit, or any line of credit, is not for you.
