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How does a home equity line of credit work?

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It's really a loan secured by a trust deed (or mortgage) on your home. The bank will tell you how much you can borrow depending on the equity you have in your home. (Your equity is the difference between the current market value of your home less the amount of any other secured loans on the property such as your purchase loan.) You can then write checks on the amount of your equity up to the limit established by the bank. If used wisely, home equity loans can be very useful particularly if they are used to enhance the value of the property by remodeling, adding a pool or other things. Home equity loans are aluring because you will not be required to pay any principal until you sell the house, just monthly interest while you live there. However, the use of a home equity loan to pay interest on other loans or day to day expenses is a death spiral. When the line runs out you can't borrow any more equity and you will have to sell your home. And, since the equity loan must be paid off along with the first mortage, the amount you get after the sale may be minimal - or you may end up owing money to pay brokers' fees, closing costs and not have any left over to pay for a new place and move. There ain't no free lunch anywhere, so only get one when you know your future is secure enough to pay it and your other bills as well.

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