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Home Equity Line of Credit

Flexible and convenient: A home equity line of credit allows you to tap into the equity in your home without selling it.  There are many advantages to home equity lines of credit including flexibility, convenience, low monthly payments and depending upon your individual situation, tax savings.  Once a line of credit is opened, funds may be conveniently withdrawn by credit card or checking account.  The funds may be used for any purpose, including home improvement. 

How to finance construction with a home equity line of credit

A home equity line of credit is a great way to get started if you are planning a major remodel of your existing home or if you will be buying a lot and building a home. In order to get a construction loan, you will need approved plans.  A home equity line of credit can be used to pay the architect, engineer and permit fees that you will incur to get your plans drafted and approved.  You can also use a home equity line of credit to purchase the land where you will build a new home. 

Comparing a home equity line of credit to a home equity loan

Like a credit card, you will be approved for a maximum amount of credit.  The credit limit will be based upon your income, debts, credit scores and the appraised value of your home.  Most home equity lines of credit allow you to withdraw funds for a period of 10-15 years.  Monthly payments of interest will be due during the "draw period".  After the "draw period" ends, a repayment period of the outstanding balance begins.  

Home equity lines of credit usually carry a variable rather than a fixed interest rate.  The variable rate is based upon a publicly available index plus or minus a "margin".      

Comparing a home equity line of credit to a home equity loan

Like a home equity line of credit, a home equity loan allows you to access the equity in your home.  Although home equity lines of credit offer many of the same benefits as home equity loans, there are some important differences to consider

Feature	Home Equity Line of Credit	Home Equity Loan
Access to Funds	Funds are either distributed in a single check or they are withdrawn on an "as needed" basis by convenience checks or a credit card  Interest is charged only on funds that are withdrawn	Full amount of proceeds distributed in a single check
Payment	Interest only percentage of balance or fixed payment	Interest only or Interest and principal
Interest Rate	variable with cap on maximum interest rate	fixed rate or variable with cap on maximum interest rate
Term	10-15 year draw period followed by repayment period	up to 30 years
Tax Savings	Available*	Available*

* Interest on a home equity line of credit or loan may be tax deductible.  Consult your tax professional to determine the tax deductions that will be available to you.