5 Benefits of Line of Credit Loans

The benefits of a Line of credit loan make this type of loan very attractive to homeowners. They are relatively easy to obtain and offer flexibility to homeowners who need to borrow cash.

Benefit #1: Borrow Larger Sum of Money with a Line Of Credit Loan

Homeowners with equity in their homes have a potential untapped source to borrow larger amounts of money with. Here’s how it works: The potential line of credit loan is the difference between what you owe on the home and what it is worth in the market. For example, if you owe $300,000 and the home is worth $500,000, the potential loan amount is $200,000. Although some states have laws that limit the amount of money you can borrow against your home, this amount is still larger than you could easily obtain through other types of financial loans. Be aware that these are second mortgages, with your home as collateral. In the event of default, the lender will foreclose on your home.

Benefit #2: Instant Cash with Line of Credit Loan

Using your home as collateral, your line of credit loan, or home equity line of credit (HELOC), allows you to draw out instant cash whenever you need it. Whenever you need money for large or small projects, you have access to it through your HELOC up to the amount of your loan.

Benefit #3: Interest Rates Less with Line of Credit Loan

Compared to the interest rates you’d pay with other types of consumer loans, the interest on line of credit loans are less expensive. HELOCs have fixed terms relative to length of loan or time you have to pay back what you borrow. Most are adjustable-rate loans tied to whatever financial parameter stipulated in the HELOC contract. Importantly, you only pay interest on the amount that you use, not the entire available amount. If your line of credit loan is for $150,000 and you only use $20,000 for a home improvement project, you’re only paying interest on that $20,000. As you pay down the $20,000, you’re paying interest only on the amount outstanding.

Benefit #4: Interest Paid Is Tax Deductible

Generally speaking, the interest you pay on your line of credit loan is tax deductible – just like the interest you pay on your primary mortgage. See your tax advisor for details. For individuals who itemize, the deduction for mortgage interest rates (primary and secondary) adds up to significant income tax savings.

Benefit #5: Use Funds for Any Purpose

When you take out a line of credit loan, you can use the funds for any purpose: remodel your home or buy a boat, second home, car, education, medical expenses or procedures, anything you choose. With this also comes the drawback that you are potentially jeopardizing your home if you run into financial difficulties and can’t make your payments. So, only take out a line of credit loan if you have calculated all of your financial obligations, have a secure job, and feel comfortable with the risk.

Another tip is to only use the money for purposes that will provide more benefit in the long run. Don’t spend the money frivolously.

 

 


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