Instead of a conventional loan, some homeowners might consider refinancing with a home equity line of credit. There are clear benefits and drawbacks of these types of conditions. Understanding what a home equity line of credit loan is, how it varies from a home loan. And how it can be used is crucial to determining whether or not re-financing with one is worthwhile. This article will briefly address both of these subjects in order to provide homeowners with details. That will assist them in determining whether or not a home equity line of credit is appropriate for their re-financing needs.
What Is The Difference Between A Home Equity Line Of Credit And A Home Equity Loan?
A HELOC, or home equity line of credit, is basically a loan in which funds are made available to the homeowner based on the home’s current equity. It is, however, a line of credit loan rather than a loan in this situation. This ensures that the homeowner will have a set sum of money available to them, and they will be able to draw on this line of credit if required. The homeowner has a set amount of time within which he or she will make these withdrawals. The draw cycle is what it’s called. There is also a payout period during which the homeowner must reimburse all funds taken out of the account during the draw period.
What Is The Difference Between A Home Equity Line Of Credit And A Home Equity Loan?
It’s easy to understand the difference between a home equity line of credit loan and a home equity loan. Although all loans are backed by the homeowner’s current equity, the way the funds are distributed to the homeowner is very different. The homeowner receives all of the funds from a home equity loan right away. A home equity line of credit, on the other hand, makes funds available to the homeowner but does not automatically disburse them.
This line of credit loan is available to the homeowner to use as he sees fit. There are restrictions on the sum that can be withdrawn, as well as to when funds can be withdrawn. There is a draw time and a repayment period on a home equity loan. During the draw cycle, funds can be withdrawn, but they must be returned during the payout period.
What Would You Do With A Home Equity Line Of Credit?
One of the most appealing features of a home equity line of credit loan is that the funds can be used. Whatever the homeowner desires. While other loans, such as a car loan or even a conventional mortgage, can impose limitations. How the money lent to the homeowner can be used, a home equity line of credit does not. A home equity line of credit is commonly used for the following purposes:
- Starting a small company
- Going on a fantasy holiday
- Home improvement or restoration projects
- Aiming for greater educational achievements
The interest charged on a home equity line of credit can be tax deductible in some circumstances. This could be true if the funds are being used to make maintenance or upgrades to the house. However, these costs are not always tax deductible, and the homeowner should seek advice from a tax advisor before deciding which interest payments are deductible.