Your home is a valuable asset. Does it make sense to harness that value? Homeowners continue to refinance their mortgages to take advantage of low-interest rates, while others are tapping equity in their homes to pay for home improvements or necessities during hard times. Whether tapping your home equity makes sense for you depends on your circumstances, your ability to keep up with payments, and the amount of equity in your home.
Equity is the difference between what you owe on your mortgage and what your home is worth. You build equity every month when you make monthly mortgage payments and when the market value of your home increases. Some home improvements also may help you build equity. You have three main options for tapping your home’s equity. In each case, your home serves as collateral for the loan, which means that if you don’t make payments, you risk losing your home.
Three ways to tap your home’s equity
- Home equity line of credit, also known as HELOC, is similar to a credit card in that you have a limit on what you can borrow, and you pay interest only on the amount that you borrow. The interest rate on the HELOC adjusts periodically, and you have to pay it back in full at the end of a predetermined time. A HELOC is a type of second mortgage.
- Home equity loan. Less common than HELOCs, loans allow you to borrow a lump sum at once and pay a fixed interest on that amount over a set period of time. A home equity loan is also a type of second mortgage.
- Cash-out refinance. With this option, you get a new mortgage for more than the unpaid principal balance on your old loan. You use it to pay off your old mortgage, and then have additional money left over for other expenses.