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A home equity line of credit is a type of loan for which equity in your home serves as your collateral. It allows you to access a set amount of money for a specific period of time. Home value, outstanding principal and ability to repay are generally used to determine the amount available to the homeowner or, in other words, the amount the bank is willing to lend. Funds can be used for anything from paying for tuition, to financing home improvements, to buying a car.
When using a HELOC as it is also known, you can access funds by writing a check, or in some cases, using a credit card. A home equity line of credit is usually a variable rate loan and the actual borrowing and repayment terms vary from loan to loan.
Benefits
- Instant access to cash for the project of your choice
- Interest on the loan may be tax deductible
- Flexible use of the money
Cautions
- Home equity lines of credit reduce the amount of equity you have in your home, at least while the loan is outstanding.
- Home foreclosure risk if loan is not repaid
- Some initial fees and some ongoing fees
Weigh the costs and benefits of a HELOC carefully. For many, it can be an ideal solution to improving cash flow.
