For some folks, they will benefit tremendously because a home equity line of credit is definitely an effective financial tool to use. At the end of the day, it’s a revolving line of credit with a variable interest rate that you can use at any time as long as you are willing to use your home as collateral.
According to Homeequitylineof.credit, a website sharing information about the best banks that offer home equity line of credit, “A home equity line of credit (HELOC) is a type of secondary financing that consists of a revolving line of credit secured by a lien junior to a mortgage.”
As you can imagine, the equity part of the home equity line of credit means that the value of your home has to be worth more than your current mortgage.
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As an example, let’s say your home is estimated at $500,000. And your current mortgage is $300,000. This means you have $200,000 worth of equity in your home.
Remember, a home equity line of credit is certainly not a traditional loan by any means. It’s somewhat similar to a home equity loan, but it’s also different in its own special way.
A Home Equity Line of Credit Is Not the Same as a Standard Home Equity Loan
You can’t necessarily compare a home equity line of credit to a standard home equity loan. Why? Because with a line of credit, the lender will give you a certain amount of available credit, but you do not necessarily have to use it unless you want or need it.
As an example, with a home equity line of credit, let’s say that your lender extends you a line of credit for $100,000.
And now, instead of borrowing all of that money at once, you decide that you only want to use $10,000 of it. This is a good thing because you still have $90,000 of credit available to use, and you only have to pay back $10,000 worth of debt.
If an emergency were ever to happen, you’d be able to tap into your home equity line of credit whenever you need it to pay for your emergency without having to scramble at the last moment to get some type of loan.
The main benefit of a home equity line of credit is the ability to have better control of your cash flow. Again, you can tap into this line of credit whenever needed and your revolving credit line lets you borrow a lump sum of money as long as the credit is extended to you.
A HELOC is Perfect for Recurring Financial Obligations
Do you have regular recurring financial obligations?
Maybe you have to pay for a new car, college tuition, or you might even need to put a new addition onto your house.
By having access to a home-equity line of credit, you will be able to get access to the funds needed to pay for these recurring obligations as the need arises. And even better, the interest on these credit lines are typically tax-deductible, so you’ll even experience tax benefits when you take out this type of loan.
You Only Have to Pay Interest on the Amount of the Line of Credit That You’ve Used
Finally, with a traditional home equity loan, you’ll have to immediately start paying interest on the full amount of money that you’ve borrowed.
On the other hand, with a line of credit against your home, you only have to pay interest on the amount of money that you’ve borrowed against the line.
To compare the two, let’s say you took out a $50,000 home-equity loan. Well, you’ll have to immediately start paying interest on the entirety of the $50,000 that you’ve borrowed.
If you have a $50,000 home-equity line of credit and borrow $5000 of it, you only need to pay interest on $5000 and nothing more.
You should certainly see the value of having a home equity line of credit. If you think it could help your financial situation and improve your cash flow, it’s certainly a good idea.