Home Equity: How to Use It

Real Estate

Home Equity: How to Use It

A refinance pays off your current mortgage and gives you cash based on your equity. This is a great way to lower or lock in your mortgage interest rate and get large sums of money – $30,000 or more. You may have to pay closing costs; discount points; appraisal fees; loan processing fees; document fees; origination fees; funding fees; loan broker fees; and miscellaneous other fees.

A home equity loan, a.k.a. a second mortgage, is good for homeowners who don’t need quite as much cash and whose mortgage interest rate is already competitive. The term is usually five to 15 years. These installment loans are paid out in one lump sum, so they’re good for repaying credit card debt or remodeling projects, even buying a new vehicle.

A home equity line of credit works like a credit card – you agree to a pre-set limit and then borrow as you need to, or in the event of an emergency, usually for up to 10 years. These are good for debt consolidation, major home improvements, college tuition and expenses, and unexpected expenses. Make sure there’s a cap on your variable interest rate. A home equity line of credit shouldn’t be used for frivolous luxury items, unless it’s a one-time purchase and not a pattern of behavior.

Are equity loans a good idea?

Nope: Use equity to pay off credit cards. Paying off car loans, credit cards or other personal debt is another popular use of a home equity loan, HELOC or cash-out refinance. But the ease with which new debts can be incurred suggests this tactic might not always be wise.

Which is better Heloc or home equity loan?

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.