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Home Equity Loan, Home Equity Line of Credit, 0 Interest Credit Card: Which is Best for You?

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In case you haven’t been keeping up with the financial news reporting, times are tough all around. Of course, the extremely rich aren’t feeling the crunch like the rest of us, but most of us are aware that the job market has tightened up, homes aren’t selling, more and more homeowners are defaulting on their mortgages and the economy overall is looking pretty dismal. Some individuals may decide to take advantage of one of the credit card deals, take out a 2nd mortgage, a home equity loan or establish a home equity line of credit to help their financial situation in these tough financial times. Some options are better than others, though.

One way to come up with some extra spending power that you may be tempted to turn to is to apply for a 0 interest credit card. This and other advertised cards seem like great credit card deals. This is one of the worse ways to manage (or should I say mismanage) your financial situation. If you can’t afford to pay for your current lifestyle, charging up more debt is not the answer. Even a 0 interest credit card only means that you’ll pay no interest on transferred balances, usually. You’ll still be charged interest for all new purchases even on a 0 interest credit card. What happens at the end of the trial period when your 0 interest credit card becomes a 12% or 16% credit card?

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Rather than apply for a 0 interest credit card, you could refinance your mortgage. This is a reasonable option if you still have relatively good credit and the original interest rate is 2 or more percent higher than the current going rate. When you refinance your mortgage, you can use the cash to pay off those credit cards and get a little cash in the savings account. The decision to refinance your mortgage is probably a good option if you plan to be in your home for several more years.

If the option to refinance your mortgage doesn’t work for you, some homeowners who have accumulated equity in their home may decide to take out a home equity loan. A home equity loan is a loan where you borrow against the earned equity in your home (original loan price minus dollar amount paid toward the principal). The payment is made to the homeowner in one lump sum. This type of loan is sometimes referred to as a 2nd mortgage.

Taking out a home equity loan or spending money from a home equity line of credit will increase your monthly payments, unless you use the money to pay off other debt, like credit cards, high interest loans, etc. In that case, you could end up lowering your monthly expenditures and perhaps even have some extra cash to put in your savings account.

Whether you own your home free and clear, or go the 2nd mortgage route, another option for homeowners with accumulated equity is to establish a home equity line of credit. The home equity line of credit allows a lender to set aside money in a “holding” account. When the homeowner wants to access some portion of the money in the account, they might write a check out of the account or request the lender transfer money electronically into their checking account. It’s important to keep in mind that you will be charged interest on a home equity line of credit, just as you are on a mortgage or other loan.

The home equity line of credit might be a good solution for someone who chooses to pay college tuition for a child on a quarterly or annual basis or if you are renovating a home in stages and want to draw out the money “as you go.”

Both a home equity loan and a home equity line of credit are sometimes referred to as a 2nd mortgage. This terminology can be confusing because a home equity loan can also be obtained by a homeowner who owns a property free and clear as well. The home equity loan or home equity line of credit are only considered a 2nd mortgage if the home loan is not paid off.

The best way to stay out of financial trouble or to get out once you’ve started down that steep decline is to get a handle on where and on what you are spending your money. You’re probably spending a lot more than you realize on coffee from the coffee shop on the way to work, pizza delivered in a couple times a week, deluxe cable television package, expensive cell phone plan and countless other ways that we take for granted when we have adequate income.

As half of former two-income couple who has learned to live on 1 full-time income (plus some free lance income) in the past year, plus pay for a daughter’s wedding, it can be done! Whether you decide to take out a 2nd mortgage, home equity loan, home equity line of credit and/or cut back in some areas of your lifestyle, doing something sooner is better that waiting until you’re in a crisis mode.

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