If you own a home and need access to cash, using some of your home’s equity may be one option to consider.
Many homeowners build equity over time as they pay down their mortgage and as home values change. If you’re looking to access a portion of that equity and turn it into cash, you may consider refinancing your first mortgage or applying for a home equity loan or a home equity line of credit (HELOC).
Both home equity loans and HELOCs are typically second liens, sometimes referred to as second mortgages. In many cases, lenders may allow you to borrow up to a percentage of your home’s value, often around 80%, minus what you still owe on your first mortgage. How much you can borrow depends on your lender, credit profile, income, and current home value.
What Is a Home Equity Line of Credit?
A home equity line of credit (HELOC) is a type of second mortgage that functions similarly to a credit card. If approved, you receive a credit line up to a set limit. For example, if you qualify for a $100,000 HELOC, you may access funds up to that amount as needed.
You only pay interest on the portion you use. As you repay what you’ve borrowed, those funds may become available to use again during the draw period, depending on your loan terms.
Potential Benefits of a HELOC
- You may be able to make interest-only payments during the initial draw period, often for up to 10 years, and only on the amount you’ve used
- Repaid principal may become available again for future use during the draw period
- You can choose when and how much to draw, or leave the line unused if you don’t need it
Potential Drawbacks of a HELOC
- HELOCs usually have variable interest rates, which means your rate and payment may change over time
- Interest rates may be higher than those offered on fixed-rate home equity loans
- After the draw period ends, you’ll typically need to repay both principal and interest, and you can no longer withdraw additional funds
What Is a Home Equity Loan?
A home equity loan is also a second mortgage, but instead of a revolving credit line, you receive a lump sum at closing. Repayment begins right away, usually with fixed monthly payments over a set term.
Potential Benefits of a Home Equity Loan
- You receive the full loan amount upfront, which may be useful for a one-time expense such as a renovation or major repair
- The interest rate is typically fixed, offering predictable monthly payments
- Interest rates are often lower than those on many unsecured loans
Potential Drawbacks of a Home Equity Loan
- Once the funds are used, they can’t be reused without taking out a new loan
- You pay interest on the full loan amount from the start
- Your home is used as collateral, which increases risk if you’re using the loan to consolidate other debt
Choosing Between a HELOC and a Home Equity Loan
Both options may provide access to your home’s equity, but they work differently. A home equity loan may make more sense for a single, planned expense, while a HELOC may be better suited for ongoing or unpredictable costs.
In either case, your home is used as collateral. Before moving forward, it’s important to review the terms carefully and make sure the payments fit your budget, as failure to repay could put your home at risk.