The Home Equity Line of Credit

If you have equity built up in your home consider applying for a home equity line of credit. Home equity, which is the difference between the market value of your home and the outstanding balance of your mortgage can be used as an asset to secure lines of credit. Is it a good idea to use the equity in your home to secure a loan?

The good points of using your home equity for a loan are:

1. Because it is a secured loan interest rates are lower than other forms of consumer credit
2. The interest paid on a home equity line of credit is tax deductible.
3. No repayment obligation exists until funds from the home equity line of credit have been accessed.

The drawback of using the equity of your home to secure a home equity line of credit or a second mortgage is that if you can't repay the loan you will be forced to sell your home to pay the debt. In some areas where home values have dropped you could find yourself owing more then the home is worth. If you wind up in this situation the home will be sold and the original home lender will be paid off but the remaining balance of your home equity loan will still be owed by you.

Debt management. How much debt can you safely carry?

Taking on debt is a major decision that should never be taken lightly. Debt is a useful tool in helping you to achieve your financial goals whether you are planning to buy a house using a mortgage, go on a great vacation and book your airline and hotels using a credit card, or buy a new car and financing it with an auto loan. Debt used responsibly can help you achieve these goals. But if you carry too much debt or become irresponsible the debt can become a cash draining burden. One of the first steps in debt management is determining how much debt you can safely manage.

How much debt can you reasonably carry before you start to run into trouble?
Most financial institutions and credit companies will use a debt to income ratio to evaluate your credit worthiness and your ability to manage that debt.

In debt management, the rule of thumb is that your monthly housing debt payments should be no more than 28% of your gross income--this includes taxes, principal, interest, insurance and fees. Your total monthly debt payments including your mortgage payment, credit card debt,auto loans, child support and alimony should be less than 35% of you monthly gross income.

If your monthly gross income is $4,000, than your monthly housing payment should be $1,120 or less ($4,000 * .28). Using the gross income figure of $4,000 your total debt should be less than $1,400 a month ($4,000 *.35).