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Some homeowners might take into account re-financing with a home equity line of credit as opposed to a traditional loan. There are definite 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 in brief cover each of these topics to give the homeowner some valuable information which may assist them decide whether or not a home equity line of credit is the perfect in their re-financing situation.

What is a Home Equity Line of Credit?

A home equity line of credit, sometimes called a HELOC, is basically a loan in which funds are made available to the homeowner based on the existing equity in the home. Still, in this case, it is not in fact a loan but rather a line of credit. This means a particular 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 specific phase in which the homeowner is able to make these withdrawals. This is known as the draw period. Moreover there is a repayment period in which the homeowner have to repay all of the funds they withdrew from the account in the draw stage.

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 in truth fairly easy. 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 dissimilar. In a home equity loan the homeowner is given all of the funds straight away. However in a home equity line of credit the funds are made available to the homeowner but are not instantly 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 There are limits to the amount which can be withdrawn and there is besides a limit on when funds can be withdrawn. A home equity has a draw period and a repayment period. Money can be withdrawn during the draw period but must be repaid during the repayment period.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 main advantages of a home equity line of credit is that the funds can be used for any point 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 subsequent:

* Home renovations or improvement projects
* Opening a small business
* Taking a dream vacation
* Pursuing higher educational goals

In some cases 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. On the other hand, these expenses are not always tax deductible and the homeowner should seek advice from a tax expert before making decisions on the topic of which interest payments can be deducted.

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