Your home's equity (the amount it is worth, minus the amount you owe on your
mortgage) can provide a significant source of money. Some common reasons for
accessing home equity include making home renovations or repairs, consolidating
credit card debt and paying for expenses such as a child's education or wedding.
You can choose between home equity loans, which allow you to take out a set
amount of money for a set period of time and home equity lines of credit (HELOCs),
which will approve you for a maximum amount and enable you to use as much or as
little as you need.
Make sure you are comfortable with the regular payments for a home equity loan or
the maximum interest rate for a HELOC. Consider your financial discipline. If you've
incurred a lot of credit card debt over the years and are looking at a home equity
loan to pay off your credit cards, you need to be realistic about your ability to avoid
credit card debt in the future.
Some uses of home equity are better than others. Renovations can be an excellent
use, because you're putting the money back into your home and increasing its value.
Other uses, such as for an investment or to supplement retirement may or may not
be your best option. Be sure to talk to a financial advisor about your specific
situation before making any decisions.
Your lender may offer a variety of terms and rates within these two types of
products. You'll want to discuss any related fees and timing with your lender as well.
Here's an overview of the differences between equity loans and HELOCs.
Fixed Interest Rate
Use the Whole Amount
Good for Single Event Expenses
Adjustable Interest Rate
Use Only What You Need
Good for Recurring Expenses
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