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Refinancing Your Home
Line of Credit Loan
A variety of options exist for home loans and refinancing those loans. Which method is right for you?
Some homeowners might consider refinancing with a home equity line of credit as opposed to a traditional loan. Each method has definite advantages and disadvantages, depending on your situation.
The key to understanding whether refinancing 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.
In this this article we will briefly cover each of these topics to provide some useful information which may help you decide whether a home equity line of credit is ideal in your particular refinancing situation.
HELOC - What is a Home Equity Line of Credit?
With a HELOC, or home equity line of credit, funds are made available to the homeowner based on the existing equity in the home. A line of credit differs from a loan in that 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, whereas a loan involves a specific amount of money, usually received from the lender in one lump sum.
With the home equity line of credit, there is a specified period in which the homeowner is able to make these withdrawals. This is known as the draw period.
What goes up must come down ... there is also a repayment period in which the homeowner must repay all of the funds they withdrew from the account during the draw period.
Home Equity Line Of Credit How Does It Differ From A Home Equity Loan?
Both home equity lines of credit and home equity loans are secured based on the existing equity in the home. A major difference lies in the manner in which the funds are disbursed to the homeowner, however.
In a home equity loan the homeowner is given all of the funds immediately. With 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 needs the money.
The lender draws a limit to the amount which can be withdrawn and on when funds can be withdrawn. A HELOC has a draw period and a repayment period.
How Can You Use A Home Equity Line Of Credit?
While other loans such as an auto loan or traditional mortgages 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. A big advantage of a home equity line of credit is that the funds can be used for any purpose specified by the homeowner. Common uses of a home equity line of credit include the following:
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. However, these expenses are not always tax deductible. The federal tax laws change from time to time, and state tax rules vary.
It's always wise to consult with a tax professional before making decisions regarding which interest payments can be deducted. Our advice? Make the best use of your available credit, enjoy what your credit brings to your life, but never make credit decisions based on tax considerations.
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