8/27/2019 | Nerdwallet
Look inside your home and what will you find? Family, pets, furniture and an abundance of memories. But, if you look at the financial side of your home, you might be able to find an investment opportunity in the form of equity.
Let’s start at the beginning, what is home equity anyway? Home equity is the difference between the market value of your home and any outstanding mortgage balances. So, a home valued at $150,000 with a mortgage balance of $80,000 would equal $70,000 in equity. Many financial institutions offer you the opportunity to borrow the equity—through a low-interest loan or line of credit—so you have extra money to pay for a variety of expenses. As with any borrowing situation, there are potential limits and cautions. Some lenders may only let you borrow 80% or 85% of your home equity. Also, because you’re using your home for collateral, the lender can foreclose on your property if you default on your payments.
If you decide borrowing against your home’s equity is a worthwhile financial strategy, you might be wondering which is best: a home equity loan or a home equity line of credit (HELOC). Our friends at NerdWallet.com provide insight into how you can choose the best option.
About home equity loans: A home equity loan is often referred to as a “second mortgage.” Home equity loans typically have a low, fixed interest rate, so they’re frequently your better source of money. They’re easier to factor into your budget, since the payment is the same each month.
About home equity lines of credit: HELOCs and home equity loans are similar in that you’re borrowing against your home equity. But a loan typically gives you a sum of money all at once, while a HELOC is similar to a credit card: You have a certain amount of money available to borrow and pay back, but you can take what you need as you need it. As a result, your minimum monthly payment will fluctuate. A line of credit usually has a variable interest rate. Pay attention to the terms offered on your HELOC: You’ll probably have a limited amount of time to use the funds.
So, which is better? Before deciding whether to apply for a HELOC versus a home equity loan, consider how much money you really need and how you plan to use it. Factor in interest rates, appraisal and closing fees, monthly payments and tax advantages as you weigh your options.
Home equity loans are helpful for reaching more expensive goals. With their unchanging payments, they’re more manageable for fixed incomes.
HELOCs are ideal for covering medical emergencies, smaller home improvement projects and paying bills that will escalate quickly if left unpaid. They’re not meant to be a long-term loan or a financial cushion for more comfortable living habits.
There are a number of ways you can get creative with your home equity loan or line of credit. You can use it for more than just home improvement projects. Consider using your equity to fund a dream vacation, fairytale wedding, or to consolidate debt.
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