When Should I Use a Home Equity Line of Credit?
When it comes to paying for these 12 big-ticket items, know when to tap the equity in your home and when to use another form of payment.
Leaky roof. Broken down lawn mower. Car trouble.
When big-ticket, unplanned expenses hit, you may be wondering the best way to pay for them. The most common loan people can get is a credit card. Other choices include an unsecured personal loan, a loan secured by personal property (like a car), a home equity loan (which you pay off over time) and a home equity credit line (where you only need to pay interest for a set period, after which you pay it off over time).
All of these products are available from a bank. Banks aren’t the only ones who lend money, though — you could also borrow from a payday loan store, although we don’t advise it.
Take a look at these 12 big-ticket items. How would you fund them? We offer our recommendations below.
1. Going on vacation: Credit card
For going on vacation, the best choice would be to use a credit card. It is convenient and can be use anywhere you go. Ideally, you would pay the balance in full when you got home. Otherwise you could end up paying extra in interest charges, making your vacation more expensive.
2. Getting the car repaired: Credit card
For getting the car repaired, the best choice would be to use a credit card. Again, you want to pay it off in full at the end of the month. If it is a big repair and it is going to take some time to pay off, you could pay for it with a home equity line of credit or a personal loan. Both options will typically charge a lower interest rate than a credit card.
3. Replacing your roof: Home equity loan
Replacing a roof can sometimes cost up to $10,000 or more. That is a lot of money to put on a credit card. You can pay for it with a home equity credit line, but a better choice may be a home equity loan that will pay off the cost of the roof over time so you rebuild the equity in your home.
4. Remodeling your home: Home equity line of credit
Anyone who has ever done a home remodeling project understands that it’s impossible to know how much everything will cost, and a credit line will let you draw on funds as needed to work through the remodel.
5. Flipping a home: Home equity line of credit
Do you have a good understanding of real estate values as well as home construction? You could use a home equity credit line to cover your costs of doing a house flip.
6. Buying a riding lawn mower: Home equity line of credit or personal loan
It’s not unusual for a riding lawn mower to cost $2,000 or more. This item be a good candidate for a home equity credit line, or a personal loan that will be paid off in a couple of years. Buying it with a credit card and paying it off over time is more expensive.
7. Buying a car: Personal loan
A car loan is the best way to finance a car purchase. Make sure you set up the payments so that the outstanding loan balance does not become higher than the value of the car. It’s harder to replace a car that is worth less than you owe.
8. Covering expenses until payday: Credit card
If your checking account is running low and you’re still a few days away from payday, the best option is to use your credit card to carry you until payday. You should avoid payday loans where the interest rate could reach 300 percent or more – ouch!
9. Operating funds for a side hustle: Home equity line of credit
Thanks to the internet and social media, running your own side job is easier than ever. A home equity credit line can give you the operating funds you need to bankroll your business.
10. Obtaining skill certification: Home equity line of credit or personal loan
Many workers have realized that taking classes for job skill certifications can give you a boost in income. These certification classes could cost a few thousand dollars. A personal loan or a home equity credit line could cover the cost which you could repay from your increased income.
11. Consolidating debt: Home equity line of credit
Sometimes a job loss or health problems can cause you to rack up debt. Using a home equity credit line to consolidate debts can make repayment more affordable. Just be careful you don’t use a debt consolidation to pay for lifestyle purchases, because you risk adding more debt instead of paying off what you have.
12. Paying for Christmas: Credit cards
Credit cards are the best loan option for Christmas purchases, especially if you pay it off right away. It’s not the best option to use a home equity credit line if you plan to just add it to your balance. You don’t want to be repaying this year’s Christmas over multiple years.
Matching the right kind of loan with your borrowing needs can save you money. Better yet, if you make it a regular habit to add to savings with every paycheck, you will find that you may even be able to avoid some borrowing situations altogether and save even more money. Visit your local Zions Bank branch to learn more about savings accounts, credit cards and home equity credit lines.
Don Milne is Financial Literacy manager for Zions Bank.