Some homeowners might consider re-financing with a home equity line of credit
divergent from a traditional loan. There are obvious advantages and
disadvantages to these types of situations. The key to understanding whether or
not re-financing with a home equity line of credit is worthwhile involves
understanding what a home equity line of credit is, how it differs from a home
loan and how it can be used. This article will briefly cover each of these
topics to give the homeowner some useful information which may help them decide
whether or not a home equity line of credit is ideal in their re-financing
situation.
What is a Home Equity Line of Credit?
A home equity line of credit, occasionally called a HELOC, is basically a loan
in which funds are made available to the homeowner based on the existing equity
in the home. However, in this case, it is not really a loan but rather a line of
credit. This means a certain amount of money is made available to the homeowner
and the homeowner may draw on this line of credit as funds are needed. There is
a specified period in which the homeowner is able to make these withdrawals.
This is known as the draw period. Additionally there is a repayment period in
which the homeowner must repay all of the funds they withdrew from the account
during the draw period.
How Does a Home Equity Line of Credit Differ from a Home Equity Loan?
The difference between a home equity line of credit and a home equity loan is
really quite simple. While both loans are secured based on the existing equity
in the home, the manner in which the funds are paid out to the homeowner is
rather quite different. In a home equity loan the homeowner is given all of the
funds immediately. However in a home equity line of credit the funds are made
available to the homeowner but are not immediately disbursed. The homeowner is
able to draw against this line of credit as he sees fit. There are limits to the
amount which can be withdrawn and there is also a limit on when funds can be
withdrawn. A home equity has a draw period and a repayment period. Funds can be
withdrawn during the draw period but must be repaid during the repayment period.
How Can a Home Equity Line of Credit Be Used?
One of the biggest benefits of a home equity line of credit is that the funds
can be used for any purpose specified by the homeowner. While other loans such
as an auto loan or even a traditional mortgage might have strict restrictions on
how the money lent to the homeowner can be used, there are no such restrictions
on a home equity line of credit. Common uses of a home equity line of credit
include the following:
* Home renovations or improvement projects
* Opening a small business
* Taking a dream vacation
* Engaging in higher educational goals
* Opening a small business
In some situations the interest paid on a home equity line of credit may be
considered tax deductible. This may be relevant in situations where the funds
are used to make repairs or improvements to the home. However, these expenses
are not always tax deductible and the homeowner should consult with a tax
professional before making decisions regarding which interest payments can be
deducted.