A very simple and absolute concept of accounting is that both sides of a balance sheet must be equal. On one side of the sheet is assets, or things that can be owned. On the other side of the balance sheet there are two items. One is liabilities, which means the same thing as debt or money owed to someone else. The second item on the balance sheet is equity. What exactly is equity? Based on the fact that both sides of the sheet must be equal, assets are equal to liabilities and equity combined. Equity is therefore the difference between the two found by solving the equation:
Equity = Assets - Liabilities
In the case of a home, equity is equal to the appraised value of the home minus the outstanding mortgage balance. What this means is that if a home was sold for its appraised value and the mortgage paid off, the remaining money, or equity, would belong to the homeowner.
The problem with this kind of equity is that most people don't want to sell their home in order to be able to spend this money that belongs to them. In response to this problem, the Home Equity Line of Credit, or HELOC, was created. This type of loan allows the homeowner to pledge the equity in their home as collateral for a line of credit. The owner can then use the money however they choose. Besides making the funds available, a HELOC offers some other benefits.
Flexibility - Unlike a regular loan that requires a person to take all of the money at one time, a line of credit allows the borrower to only advance as much money as they need. Also different from traditional loans is the ability to borrow the money, pay it back, and borrow it again.
Control - Typically, when a bank makes a loan, repayment of the loan is tied to the use of the money. Because a HELOC is secured by the borrower's home, banks feel more confident in the fact that the money will be paid back, so they will usually allow the borrower to use the funds for whatever they choose.
Tax Benefits - Because the line of credit is secured by the borrower's home, the interest paid on the loan is typically tax deductible.
With the creation of the HELOC, homeowners are now able to actually get the money that is theirs without selling their home. To learn more, contact a lender like General Electric Credit Union.
