Tips about Line of Credit Refinancing - Line of Credit vs Refinancing

In a modern society homeowners might consider re-financing with a home equity line of credit as opposed to a traditional loan. Anyway, these situations have both advantages and disadvantages. The key to understanding whether to implement re-financing with a home equity line of credit or not is worthwhile as it requires comprehension of 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 provide houseowners with useful information which may help them decide whether a home equity line of credit is ideal in their re-financing situation or not.

What is a Home Equity Line of Credit?

Generally, a home equity line of credit (abbreviated as HELOC) is a loan in which funds are made available to homeowner based on the existing equity in property. However, in this case, it is not really a loan but rather a line of credit. This means that a certain amount of money, which may be drawn according to this line of credit as funds are needed, is made available to the houseowner and time of these withdrawals is specified. This is known as the draw period. Additionally, there is a repayment period in which the homeowner must repay all of the funds he/she 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 property, the manner in which the funds are disbursed to the houseowner is 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 cannot be immediately disbursed. Afterwards, there are limits to the amount which can be withdrawn and there is also a limit on time when funds can be withdrawn. Thus, any home equity has a draw and a repayment period and funds can be withdrawn during the draw period but must be repaid during the repayment period.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 purpose specified by the homeowner unlike the other loans such as an auto loan or even a traditional mortgage which have more restrictions on how the money lent to the homeowner can be used. 

Thereby, 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

It should be noted that in some cases the interest paid on a home equity line of credit may be considered tax deductible. This may be applied to the 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 tax professional before making any decision on the kind of interest payments which can be deducted.