Consumers who like to manage their mortgage loan efficiently and like to have the freedom to draw down used equity or surplus funds in their home loan account, might just find that a line of credit mortgage product is just for them.

Definition: Line Of Credit

A line of credit is popularly referred to as an LOC. This is probably one of the most popular forms of revolving credit, second only to credit cards. In the formal sense the definition of line of credit is a credit contact between a client and the financial institution whereby the client can readily access funds as if it were their own savings account. Interest on lines of credit is only charged on the used portion of the loan. In other words if the total limit of the line of credit is $500,000 and the consumer has only used $300,000 then the interest will only be levied on the $300,000 and not the full loan amount like a normal standard variable home loan/mortgage. This is quite advantageous owing to the fact that if you have been making larger repayments into your mortgage, in effect over time you will be reducing your interest repayments as you are constantly reducing your Line Of Credit outstanding balance.

Common Uses Of A Home Equity Line Of Credit

Being as versatile as they are a home equity line of credit can be used for a variety of purposes. Some common uses of lines of credit are:

1. Managing your home loan better
2. Using the available redraw in your line of credit to make investments.
3. Using the surplus available in your LOC for repairs, improvements and payment of bills around the house.
4. To meet unexpected and urgent expenses.
5. Consumers at times use the surplus/redraw available in their LOCs to pay for holidays etc. This is owing to the fact that the interest rate on an LOC is much lower than credit cards and in addtion not only do you get a much longer term to pay of the amount (over your home loan period) but you also do not have to tap into your savings.

Pros & Cons Of A Home Equity Line Of Credit

The following are a few advantages of a line of credit loan:

• You always have easy access to the money as it is sitting in your home loan account and you do not need to go though the process of applying for a new loan etc.
• LOCs give you the ease of making a single repayment for several bills, as you are only paying off your line of credit or mortgage account.
• The interest rates on a line of credit are much lower and expenses paid of your redraw can be paid back over the course of your mortgage.
• As long as consumes are cautious that they do not exceed the limit on their LOCs the can keep drawing down on the funds.

As is the case with all good things line of credit loans aren’t free from a few flaws either. Some of them are as follows:

• The interest rates on LOCs are open to fluctuations and as a result of that you might find your repayments varying with interest rate changes.
• In case of a residential loan for a main/principle residence consumers must ensure that over the course of the loan the principal component of the line of credit is reduced.
• Sometimes having a lot of credit/redraw available might lead to clients developing a habit of overspending.

Home Equity Loan Line Of Credit & Your Credit Report

A line of credit loan can be very beneficial for your credit report. If you have successfully managed to pay down you outstanding balance with larger and timely repayments, this stands you in good stead with the credit reporting agencies like Experian, Equifax and Transunion. Moreover if you have a large limit on your line of credit and are only using a portion of it with a decent amount unused, this will also help boost your FICO score.

Hence as we have discussed that a line of credit can be a very powerful tool to help you manage not only your home loan better but will also help you manage a lot of your own personal finances. It is however essential that consumers evaluate their situations before getting a mortgage product as this is a matter of personal choice. Lines of credit are powerful financial tools designed to give consumers the advantage and freedom of managing their finances and credit effectively.

References:

1. What is the Advantage of a Secure Line of Credit? – All Business