ANSWERS: 1
  • A home equity line of credit, or HELOC, is a method of borrowing that allows a homeowner to use the equity in his home as collateral for a loan. It is similar to a credit card in that the balance can be run up and paid down as desired.

    Significance

    A home equity line of credit allows a borrower not only to use the equity in his home as collateral, but also to write off the interest expense on his taxes as a deduction. Using it for debt consolidation is a great way to reduce the borrower's overall interest expense.

    Function

    A home equity line of credit carries a much lower interest rate than a credit card, because the balance is secured by the equity in the home. A borrower could use it as a cheaper alternative to a credit card.

    Types

    A home equity line of credit can be a fixed or variable rate loan, with payments amortized over 10 to 15 years. This allows a borrower to extend debt payments longer, which can help him budget and use the HELOC to pay down his debt faster.

    Considerations

    Many borrowers use home equity lines of credit to finance repairs or additions to their home. Others use them as a way to consolidate higher interest rate debts and deduct the interest expense on their taxes.

    Warning

    A HELOC should not be used for frivolous spending, such as dining out or clothing, because that wastes the equity built up in the borrower's home.

    Source:

    InvestorWords.com: Home Equity Line of Credit

    FederalReserve.gov: Home Equity Lines of Credit

Copyright 2023, Wired Ivy, LLC

Answerbag | Terms of Service | Privacy Policy