The equity in your house can indeed finance major repair costs, but please make sure you understand the risks involved. If you take out a home equity line of credit (HELOC) or a home equity loan (HEL), your home is the collateral. Fail to keep up with the payments, and you could lose it.
HELOCs are popular, but they can be a financial headache. They're a lot like credit cards: You have a set limit to tap anytime you want, and the interest meter doesn't start running until you actually take the money. So what's the problem? Well, most HELOC rates are adjustable, meaning they can—and will—change every time their benchmark index changes. And that means higher payments for you. The current HELOC rate (assuming you have a really great credit score) is a stiff 9.25 percent. Yes, it's true that interest payments can be tax deductible, but you'll still be paying way too much.
The interest rate on a HEL is fixed, meaning the rate you get at the start is what you pay forever. But the trade-off—and you knew there had to be one—is that your interest meter starts running immediately. If you take out a $25,000 HEL, you'll get $25,000 on day one and owe interest on it pronto. But if you are looking at a big-ticket repair job that you don't expect to be able to pay off within a year or so, a HEL will give you more stability than a HELOC.
Personal finance expert and O, The Oprah Magazine columnist Suze Orman prioritizes between paying down your credit card debt and saving your money.
Please note: This is general information and is not intended to be legal advice. You should consult with your own financial advisor before making any major financial decisions, including investments or changes to your portfolio, and a qualified legal professional before executing any legal documents or taking any legal action. Harpo Productions, Inc., OWN: Oprah Winfrey Network, Discovery Communications LLC and their affiliated companies and entities are not responsible for any losses, damages or claims that may result from your financial or legal decisions.
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