Leveraging home equity may be a smart way for homeowners to finance a major home improvement, consolidate debt, pay for their next big purchase, or even start a business. Many homeowners have significant equity in their homes and can obtain a home equity loan or line of credit to access that equity for a variety of purposes.

With a line of credit, homeowners pay nothing until they begin using it. In fact, some savvy homeowners obtain a home equity line of credit in the event they have an unforeseen expense or need funds in an emergency. It serves as a safety net of sorts and requires no payments until funds are accessed.

Home equity lines of credit can also be used in conjunction with a first mortgage to purchase a property. By obtaining a home equity line of credit with a new first mortgage, buyers may access the funds to increase their down payment and thus avoid the cost of mortgage insurance. Lenders typically require this type of insurance if you have less than a 20 percent down payment.

Some home equity line of credit advantages include:

Lower Interest Rates

Home equity rates are often more favorable than credit card or installment loan interest rates and can mean lower monthly payments than on other loan types.

Get More for the Effort

In many instances, a homeowner can tap up to 100 percent of the home's equity through a home equity line versus 90 percent through refinancing.

Shorter Pay-Off Time

Home equity loans and lines of credit usually must be paid off more quickly than long-term mortgages. Loan terms on fixed rate home equity loans can be 10, 15 or 30 years. Home equity lines of credit typically have a 10-year "draw" period in which the line of credit is open for re-use as it is paid off. After the draw period, the principal and interest are paid down over 15 years.

Refinancing Alternative

Homeowners with already low-interest first mortgages might not benefit from refinancing, but they can take advantage of the appreciation in their property value by accessing a home equity loan or line of credit. Many homeowners took advantage of the last refinancing boom to lower the interest rate on their first mortgages. Now, they may desire funds to make home improvements, pay for college, or a variety of other needs. Instead of refinancing their home again, they can take out a home equity loan and possibly gain a tax advantage by deducting their interest payments. For details on the tax advantages, homeowners should check with their tax advisor.

Continual Access to Funds

As a homeowner pays off their line of credit, that same amount of credit becomes available again. With this option, there is no need for homeowners to apply for a new loan every time they need additional funds. Lines of credit also offer payment flexibility, allowing borrowers to pay interest only or making lump sum payments if they wish.