Home Equity Line of Credit

Will You Save Money with a Home Equity Line of Credit?

There are several benefits of taking out a home equity line of credit over traditional mortgages or other credit options. If you're considering applying for a home equity line of credit, you should carefully consider your options. You may even want to consult a financial advisor before you decide whether a home equity line of credit is your best choice.

In order to gain a home equity line of credit, you have to have equity in your home. Equity is, quite basically, the value of your home that is above and beyond any mortgage or loan against the home. That means that it's possible to take out a home equity line of credit even if you have an existing mortgage, but only if that mortgage is less than the value of your home. You should also keep in mind that most lenders limit the amount of loans against a home to 80 or 90 percent of the value of the home. If the lender follows that standard, you will only be able to get a home equity line of credit if your current mortgage is less than that amount.

Arguably, the most common reason for seeking out a home equity line of credit is to pay sporadic bills. In some ways, a home equity line of credit works like a credit card. You can withdraw money from the home equity line of credit whenever you want and use the proceeds for any purpose. Remember that your house will stand as collateral for this kind of loan - if you have doubts about your ability to repay the loan you should probably not take out money even if it's available from an existing home equity line of credit. You are running the risk of losing your home.

A home equity line of credit has some similarities to a refinancing loan, but one of the major differences is the ability to withdraw the amount of money you need at a given time. You will only be charged interest on money you've withdrawn. In other words, you may have a home equity line of credit for $25,000, but you may have only withdrawn $10,000. You'll only be charged interest on the $10,000 and will never pay interest on any of the money that you don't withdraw.

Another major benefit of a home equity line of credit is that interest paid on this kind of loan is tax deductible, just like for any other home mortgage. While that may not be important to some people, those who are looking for tax breaks may find this to be a very effective way of paying off credit card or retail store card debt.