Re-Financing With A Line of Credit Loan

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When a borrower is thinking of re-financing with a line of credit loan over traditional loans, there should be a proper understanding of advantages and disadvantages involved.

Our first concern of course is to understand about Home Equity Line of Credit, since this is how credit loan line will be granted. Home equity line of credit or HELOC, a type of loan granted based on the amount of equity or that part of your home that you already paid for.

Factors to Consider When Re-financing with a Line of Credit Loan or HELOC

How are HELOC Facilities Availed?
This is not the regular type of loan in the sense that a credit line or series of small loan take-outs will be availed and charged against the credit line. HELOC terms and conditions, there is a time frame called draw period and a credit limit within which funds can be withdrawn from the approved credit line. The repayment period is also scheduled based on the agreed terms and conditions between the lender and the borrower. The option lies with the borrower whether to choose re-financing with a line of credit loan over other types of loans.

How Much Can Be Loaned if Re-financing with a Line of Credit Loan or HELOC?
To have a better understanding how HELOC is computed by some lenders, this is usually done by assigning a certain percentage on the appraised value of the home and deducting the balance owed on mortgage to arrive at the potential credit line. As an example, appraised value of the home is $200,000 with a balance owed on mortgage of $80,000. If the lender assigned a 75% loan value based on the appraised value of the home, the potential credit line is $70,000.

This is computed by $200,000 X 75% equals $150,000 less $80,000 equals $70,000.

If a borrower decides re-financing with a line of credit loan under HELOC, the allowed credit limit may probably be $70,000 or even lower.

How Much will it Cost to Refinance under HELOC?
Re-financing with a line of credit loan under HELOC involves some costs such as, application fee, appraisal fee, up-front charges and closing costs which are also similar to the traditional home loans. The application fee if re-financing with a line of credit loan under HELOC is refundable if disapproved. The appraisal fee is used to determine the value of the home. Up-front charges are usually one percent of the credit limit. Lastly, closing costs are expenses for taxes, insurance for property and title, preparation and filing of mortgage, title search and attorney's fee. Hence, the borrower should consider these expenses before re-financing with a line of credit loan.

What's the Difference if Refinancing is under HELOC or Home Equity Loan?

If you will have your loan refinanced under the traditional home equity loan, the funds are immediately released and the whole past due loan under refinancing can be paid off. Hence, it will immediately assume current status and will cease from being charged with past due interests and penalty charges.

Under HELOC, loans are released in portions and only a part of your past due debt can be paid off. Past due interest charges will only reduced but will continue to run, although this time based on a reduced principal amount.

What are the Advantages of Re-financing with a Line of Credit Loan or HELOC?

The main advantage of re-financing with a line of credit loan under HELOC is that it can be used for different purposes enumerated in the loan application. This is in contrast to traditional mortgage and auto loan where the funds should be used for a specific purpose. The use of HELOC is varied such as home renovations, improvements, venturing in a small business, education, etc. Also, the interest that was paid in re-financing with a line of credit loan under HELOC is tax deductible when used in home repair or improvement.

In case of doubt, consulting a tax professional is advised regarding interest payments as well as ascertaining what are allowed as deductible expenses. Nevertheless, the decision to avail re-financing with a line of credit loan remains at the discretion of the borrower.