Home equity loans and your credit cards

The mortgage industry is a creative one; when a new need appears in the market, they are armed with new products to help take advantage of it. As housing values have gone through the roof in the past few years, long time mortgage holders who are equity-rich are ready to take out equity loans. homeowners do not necessarily take out home equity loans because they must have the cash; it just seems like a waste to have hundreds of thousands of dollars worth of property value sitting around doing nothing.

Continued below

Usually, home equity can be used in several ways, the most obvious of which is a home equity loan. A home equity loan is a loan borrowed on the property and the mortgage company gives the homeowner a check for the loan amount. The borrower pays back a home equity loan over a set time period on a set repayment schedule. You then pay back a home equity credit line a small amount at a time, as though it were a credit card bill. The rate of interest on a credit line is variable, and you can take as little or as long as you like to pay back the money. The mortgage industry offers the home equity line of credit, which operates like a checking account - you are approved for a predetermined amount and you write checks to spend the money as required.

A modern method of taking advantage of your property's equity is a mortgage with a credit card. Instead of writing checks, you can now spend your home's value using a Mastercard or Visa. You can use the equity line anywhere charge cards are accepted, and spend it on whatever you like - toys at Wal-Mart, books at Amazon, or new shoes at Bloomingdale's. For purposes of spending, an equity charge card seems to work much like any other credit card, with one major exception.
 

With normal charge card use, you accumulate debt that is not backed up with collateral. Credit card debt has no collateral to back it up; if you default, you can be sued for failing to pay, but the card-issuing bank can't approach you and take anything from you as compensation. Equity credit cards, and the financing they represent, are secured by your property, and if you cannot pay, you might lose your house. Unlike typical charge cards, equity-based accounts are backed by collateral - your house.

Be careful with an such an account, or you could wind up risking a lot of money. Unless you repay that money every month as you use it, those bills that you run up with these cards will accumulate interest, just as with a traditional charge card. These accounts will gather less interest than you would normally pay on a charge card loan, but it is interest nonetheless. Debtors tend not to pay off credit lines very quickly, so the interest will build up. That tank of gas that you buy using your property value is one that you could be paying for over the next five or ten years, with interest.