Is a Home Equity Line of Credit Risky?

An HELOC is a line of credit that comes from the equity in a home, and you will understand this better if you separate out the two terms; line of credit and home equity.

* Line of Credit – This is the line of credit that comes from any arrangement made with a lender or a bank who will extend credit to a specified amount to any borrower for the time agreed to.

* Home Equity – This consists of the value that your home will have if it goes on the market, less any debts that are registered or associated with it.

Does This Make it a Giant Credit Card?

When these two are combined; home equity and line of credit, this then gives you a revolving credit that assumes the equity you have in your home, as collateral. Whenever you have a need for additional finance, you can draw on, and then you can arrange for funds through this line of credit. You need to stay within the credit limit, but this allows you to arrange the funds that you need for expenses like medical bills, tuition fees and improvements for the home.

The use of any money that you get from this line of credit that is secured by home equity must be done sparingly. The money should only be used to pay for things that are important. This need for caution comes from the ultimate risk that is associated with this financial option.

Foreclosure – The Ultimate Risk

When you are unable to pay your dues against this financial option, it can result in foreclosure of the home you probably live in, and this is a universal fact associated with mortgages all over the world; in Australia or elsewhere. That is the reason you need to make sure that dues are always settled, as and when they are due. You can always choose the pay the minimum due, but this is not a wise thing to do. It will then make it impossible to reduce the amounts that you will have to repay, and try to make sure that the payments you make on a monthly basis cover more than the basic rate of interest.


Other risks

When you have a line of credit that is based on home equity, it is the market value of your home that determines how healthy your credit is. If for any reason, the lender feels that the value of your home has decreased, or they are left with a feeling that you are not in a position to honour your promises of monthly payments, they can choose to reduce your credit limit, or in extreme cases can even freeze the account.

You will need to talk with your lender if you have to face any one of these two situations. You can find out from them how you can restore your account. This may require you to prove that the value of your home has not decreased. You must also be able to convince them of your ability to make payments as when they are due. Your arguments will be strong if you can prove what you are saying. Documentation can lend authenticity to what you say.

If your negotiations with the lender do not solve the problem that has arisen, you have to look at other alternatives to get the required line of credit. This must be with the best mortgage rates. If you are lucky in making these alternate arrangements, you can repay of your earlier line of credit and replace it with a new one. Obtain any clarity of anything that you do not understand from people who know of these things. There are many professionals who know about professional mortgage broker Sydney and lines of credit and will be able to help you.

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