There are several different ways that you can use the equity in your home to finance home improvements, pay off your credit card debt and to pay for other expenses. The most common ways that people use the equity in their homes to cover these expenses is to either refinance their homes or to take out a second mortgage (also referred to as a debt consolidation loan). While these are both viable options there is another option that you can also select, a HELOC.

What Is a HELOC?

A HELOC, or home equity line of credit, is a line of credit that is secured by your home. It works a lot like a credit card. When the loan is established, the borrower doesn't get a lump sum payment. Instead, the borrower is given a line of credit that they can make withdrawals from. The borrower has a minimum monthly payment that they will need to pay. However, this amount usually reflects only the interest that is due on the account. During the life of the HELOC the borrower gets to decide how much of the principal they pay back and when they pay it back. At the end of the HELOC term, usually somewhere between 5 years and 25 years, the borrower will either need to pay a lump sum balloon payment for the outstanding balance or they can choose to amortize the outstanding balance on the HELOC like a regular loan over a period of 5 to 10 years.

Why Should You Refinance with a HELOC?

HELOCs are very versatile financing tools. You can use them for just about any purpose. You can use HELOCs to pay off high interest rate credit cards or auto loans. If you are putting your kids through college then you can use a HELOC to withdraw money over time to pay for books, tuition, and student fees as they become due. HELOCs are also good for paying for home improvements, or to pay for an emergency repair. If you own a business a HELOC can also be a great way to improve your cash flow. For example, if there’s a month when you are short on cash, you can withdraw money from your HELOC to cover your expenses. When your income flow returns to normal, you can pay down your HELOC balance.

The Advantages of Refinancing with a HELOC

The HELOC has several advantages over other debt consolidation and financing options. First a HELOC offers flexible repayment terms. As a borrower, you get to decide when and how much of the principal you repay during the life of the loan. The second advantage is that the line of credit is revolving. This allows you to use your HELOC like a low interest credit card. Finally, interest charged by the HELOC is tax deductible in most cases. This means that if you transfer your auto loan and credit card balances to you HELOC, you will be able to deduct the interest charged for these items from your taxes.