A Wells Fargo Home Equity Line Of Credit is a long-term credit arrangement that uses a home value as security. Home equity lines of credit generally offer the large amount of credit at low monthly payments over a long period that is called the draw period. These credit arrangements offer the clear advantages and disadvantages and investors should become familiar with the risks of Wells Fargo home equity line of credit before taking advantage of these unique loans.
Wells Fargo Home Equity Line Of Credit
Wells Fargo home mortgage equity line of credit is a credit amount that the bank extends to the borrowers based on the amount of equity that is available in their house. Basically, equity is the amount of money that remains when borrowers deduct the balance of their mortgage from the fair market value of the house. Wells Fargo home equity line of credit is use against a home as security. Home equity lines of credit and home equity loans have similar names, but these are two different products. Home Wells Fargo equity lines of credit acts like a credit card in which homeowners get a certain amount of credit based on their home’s equity and then use that to make purchases, much like they would with a credit card. Wells Fargo home equity loan provides homeowners with a lump sum cash that is based on the amount of equity in their homes, but the benefits come with both types of loans.
Pros and Cons of Home Equity Line Of Credit
Low Interest Rates: The major benefit of both home equity lines of credit and home equity lump-sum loans are lower interest rates. A $30,000 home equity line of credit mostly comes with an average interest rate of 5.1 percent and a home equity loan for the same amount can carry 7.49 average interest rate. These rates are far lower than the typical interest charged by credit card companies.
Flexibility: Wells Fargo home equity line of credit offers homeowners flexibility in how they spend their money. In fact, homeowners never have to draw on their line of credit. Some homeowners use it as a form of financial protection, knowing that they can draw on their home equity line in case of emergencies like roof repairs or car expense. But if emergencies do not arise the homeowners can simply leave their home equity line of credit untapped. Homeowners must make payments on their home equity lines of credit only when they use it.
Stability: Some of the homeowners prefer lump-sum home equity loans because of their stability. A home equity loan comes with a fixed interest rate that can never be changed over the life of the loan. However, a home equity line of credit comes with variable interest rates that can change depending on the performance of certain financial indexes. Once homeowners take out a home equity loan, then the money is theirs. They simply have to make their monthly payments on time to pay it back.
Tax Benefits: Some of the interest paid on home equity line of credit (HELOC) is tax-deductible. Interest on amounts up to $1,000,000 is tax-deductible if used solely for home improvement purposes, but for all other purposes, the interest on loans up to $100,000 is tax-deductible. Only HELOCs and home equity loans offer this tax benefit, but consumer loans do not.
Getting Into More Debt: Paying off high interest credit cards is the most common reason of people to apply for a HELOC. While this makes financial sense due to the significantly lower interest rate on HELOCs, but there is also a huge risk that people who ran up their credit card balances will pay off their credit card with the HELOC and then result additional balances on their credit cards ending up with more debt than before they took out the HELOC.
Interest Options: The payments on HELOCs with variable interest rates will vary based on a publicly available index such as the prime rate. These loans may start with lower payments, but it can also increase over time potentially increasing the financial status of homeowners. HELOCs with fixed-rate interest incline to begin with higher interest rates than variable-rate HELOCs, but the interest rate remains constant throughout the term of homeowner loan.
Changes Of Status: The bank can change the status and amount available in a line of credit to homeowners at any time. If the home price of borrowers alternates or homeowners credit score goes down, then the bank may freeze the homeowners account, to prevent further usage or decrease the amount of credit made available to homeowners. A regular home equity loan that is also called a second mortgage loan to the borrowers the amount as a lump sum that is removing any possibility of the bank changing the status of borrowers’ loan.
Ease Of Spending: Home equity lines of credit are easy to use, although they may not be easy to obtain. Since monthly payments are low and credit levels are high, but consumers can quickly find themselves with buyers’ self-accusation and a large amount of debt. As with credit cards it can be easy to get out of control while justifying current purchases with future income expectations which may not always turn out as planned.
Default Risks: More serious dangers are present if homeowners cannot obtain a secondary loan to pay off their home equity line of credit balance at the end of the draw period. Besides from your taking a hit to the credit score and potentially seeking bankruptcy the bank may choose to foreclose on homeowners, home leaving them looking for a new place to live.