When to Refinance to a Line of Credit Home Loan

September 12, 2017


When you first took out your mortgage, you probably didn’t realise you’d be remodelling your kitchen in five years or how much you’d benefit from rolling your major lifestyle expenses into one account ten years down the line. A line of credit home loan can be used for all of this and more. Property investors will often switch to this type of loan to free up equity to purchase a new property.

While you probably didn’t start out with a line of credit home loan as interest rates on these loans are often higher than what you’ll see on basic variable or fixed rate loans, you may reach a point where you need to access your home’s equity to meet certain financial goals.

When managed responsibly, line of credit mortgages can offer you a great deal of flexibility. If you are strategic with how you manage your loan account, you could even save money on interest.

If you are considering refinancing to a line of credit loan, here are the factors you should keep in mind to benefit from all that this type of lending product has to offer.

What Can You Do with a Line of Credit Loan?

If you have built up a sizeable amount of equity with your current loan, refinancing is a straightforward way to free up with extra equity to make other purchases. You can use the credit to buy a new car, renovate your home, or even fund your family’s summer vacation. It can also be used to consolidate debts. Imagine moving credit card debts, your business loan, and the rest of your school loans all into one place – at your low mortgage rate.

Because you can keep borrowing more against the amount you have paid down, you’ll have the freedom to suit your mortgage to your financial needs at different stages in your life. For example, you may decide to refinance to a line of credit to do a home renovation. Then, five years later, you may decide to use your line of credit to pay for your child’s education. Once you have enough of your loan paid down, you can use it to invest in a second property. The possibilities are endless.

Who Line of Credit Home Loans May Not Be Right For

As long as you are responsible, you can both simplify your finances and save by switching to a line of credit loan. By depositing your income into your account and then only withdrawing what you need, you’ll be able to lower the overall amount of interest you’ll pay on the loan. Look for a line of credit loan product that also allows you to make unlimited additional repayments so you can pay down your debt even faster. These strategies could help you save thousands of dollars over time.

However, you may not want to refinance to a line of credit loan if the flexibility becomes financially destructive rather than empowering. If you would be tempted to use the cash you have access to, for unnecessary purchases, you may want to consider a different financial strategy for reaching your goals. With a line of credit loan, you can keep borrowing more as long as you are making your repayments on time. This means you can end up taking much longer to pay off your mortgage.

To make a line of credit work, you have to stick to a budget and practice financial restraint. Decide what you will use your new loan for and stick to your plan. It’s also helpful to have extra money set aside to help make your repayments if you extend yourself too far.

Refinancing to a line of credit home loan can set you up to meet your financial goals. Before making the switch, take an honest look at your finances, your financial needs and, most importantly, your spending habits.

Written by Refinancing.com.au

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