Re-Financing with a Line of Credit Loan
Some homeowners might consider re-financing with a home equity line
of credit as opposed to a traditional loan. There are positive
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, at times called a HELOC, is
fundamentally 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 pretty simple. While both loans are secured
based on the existing equity in the home, the manner in which the
funds are disbursed 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 There are limits to the amount which can be withdrawn and there
is also a limit on when funds can be withdrawn.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 Funds can be withdrawn during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 advantages of a home equity line of credit is
that the funds can be used for any intention 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
* Pursuing higher educational goals
* Opening a small business
In some circumstances the interest paid on a home equity line of
credit may be considered tax deductible. This may apply 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.
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