Be Smart When Tapping into Your Home’s Equity

If you own your home and are in need of some extra cash, why not consider a home equity loan? If you have equity in your home, difference between your home’s appraised value and any outstanding mortgage debt, a home equity lender will grant you a loan using this equity as collateral. While you can use this money for anything you wish, most homeowners use their equity loans for new car purchases, home remodeling projects, etc – large one-time expenses.

There are two forms of these loans – home equity loans and home equity lines of credit.  With the first option,  at closing you will receive a lump sum payout and your loan payments will start the following month usually.  Whereas the second option provides a line of credit to be drawn against whenever you wish.  This is the best option if you don’t know when you plan to use the money or if you do not anticipate large one-time expenses.  With a line of credit you only pay for what you use (note: some home equity lenders do charge annual fees to keep the credit line action).

Generally equity loans are fixed rate home equity loans meaning that your payments are fixed and the underlying interest rate will never adjust.  Home equity loans typically have a 10-year amortization period.  Home equity lines of credit, on the other hand, feature variable rates and variable payback terms.  Some lines of credit are even interest only – meaning you only to have pay the interest due each period, but are not required to make principal payments.

There are many uses of home equity funds.  But homeowners have to remember to be smart with these products, because unlike unsecured consumer debt like credit cards, home equity loan products are secured by their homes.  So this money should only be used for worthwhile expenses like home remodeling where you are actually increasing the value of your home.  Or if you are having trouble finding a decent car loan, you may be able to secure a lower home equity loan interest rate.  But try to prevent yourself from using this money for say an elaborate family vacation where you have nothing to show for the expense after you return.

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