Some homeowners may want to consider refinancing with a home equity line of credit instead of a conventional loan. There are clear advantages and disadvantages to these types of situations. The key to understanding whether refinancing with a home equity line of credit is worthwhile is to understand what a home equity line of credit is, how it differs from a home loan, and how to use it. This article will briefly cover these topics to provide homeowners with some useful information that may help them decide if a home equity line of credit is ideal for them to refinance.
What is a home equity line of credit?
A home equity line of credit, sometimes referred to as a HELOC, is essentially a loan that provides funds to a homeowner based on the existing equity in their home. However, in this case, it is not really a loan, but rather a line of credit. This means that there is a certain amount of money available to the homeowner and the homeowner can draw on this line of credit when they need the funds. There is a specific period during which the homeowner can make these withdrawals. This is called a draw period. There is also a repayment period where the homeowner must repay all funds they withdrew from their account during the withdrawal period.
What is the difference between a home equity line of credit and 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 by the existing equity in the home, the way the funds are disbursed to the homeowner is very different. In a home equity loan, the homeowner receives all of the funds immediately. However, in a home equity line of credit, funds are provided to the homeowner but not paid out immediately. The homeowner can draw on that line of credit as he sees fit. There are limits on the amount that can be withdrawn and there are also limits on when the funds can be withdrawn. There is a draw period and a repayment period for the equity in the home. Funds can be withdrawn during the draw period, but must be repaid during the repayment period.
How do I use my home equity line of credit?
One of the biggest advantages 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 auto loans or even traditional mortgages, may have strict restrictions on what the money lent to the homeowner can be used for, a home equity line of credit has no such restrictions. Common uses for a home equity line of credit include the following.
* Home improvement or betterment projects
* Starting a small business
* Taking a dream vacation
* Pursuing higher educational goals
* Starting a small business
In some cases, interest paid on a home equity line of credit may be considered tax deductible. This may apply when the funds are used for repairs or improvements to the home. However, these expenses are not always tax deductible, and homeowners should consult a tax professional before deciding which interest payments are tax deductible.