If you’re a homeowner and need money — to reduce debt, fund education, make home improvements, or pay for something else — you can borrow against the value of your house. It’s important to know what you’re doing, though, before you sign on the dotted line.
There are two primary ways to borrow against your home: by taking out a home equity installment loan (second mortgage) or through a home equity line of credit (HELOC). Equity is the difference between what you currently owe on your house and its current market value. A percentage of the equity amount is what you can borrow.
- Home Equity Installment Loan — You receive a set amount of money when you get the loan and repay it through equal monthly payments for a certain number of years. The loan has a fixed interest rate.
- Home Equity Line of Credit (HELOC) is a form of revolving credit (think of it as a credit card against the equity in your house) that allows you to determine how much money you borrow and when, up to a certain amount (your credit line). A HELOC typically has a variable interest rate, and you can take out money any time for a certain draw period.
To figure out which loan style is best for you, ask yourself:
- Do I want the cash all at once (loan), or in a series of ongoing draws (line)?
- Do I want the payments to remain the same each month (loan) or would I mind if the payments changed month-to-month, as long as I only make payments on the amount of money I use (line)?
- How much time will I need to pay it off?
- How large of a monthly payment can I handle?
Here are a few things to think about before going the home equity loan route:
- Your home’s value may fall over time, which could lower how much equity you can borrow against.
- Often you cannot lease your home during the term of the loan.
- If you don’t pay on the loan, you could lose your home.
Sources: AmeriCU.org; Federal Trade Commission