You have equity just sitting in your home untouched. If you want to access it and to turn it into cash, you’ll need to refinance your first mortgage or take out a home equity loan or line of credit.
Both the home equity loan and line of credit are second liens or second mortgages on your property. You can typically borrow up to 80% of the home’s value with both loans, deducting your first mortgage from the amount. The amount that remains is what you can borrow, but the similarities end there.
What is a Home Equity Line of Credit?
The home equity line of credit (HELOC) is a second mortgage that works like a credit card. You receive a credit line equal to the amount you borrow. For example, if you qualify for a $100,000 home equity line of credit, you'll receive a line of credit for $100,000. You can use the funds as you need them. As you repay the portion , you can reuse the funds, much like a credit card.
Benefits of the Home Equity Line of Credit
- You can make interest-only payments for the first 10 years and only on the amount you withdrew
- You can reuse the funds if you pay back the principal
- You can withdraw the funds at your leisure or leave them untouched if you don’t need them
Drawbacks of the Home Equity Line of Credit
- HELOCs have variable interest rates, which means you may have a different interest rate each month
- Interest rates are often higher than home equity loans
- After 10 years, you must make principal and interest payments and can’t withdraw funds any longer
What is a Home Equity Loan?
A home equity loan is also a second mortgage, but it doesn’t have the draw period like a HELOC. Instead, you receive the full amount of the loan at the closing. You use the funds as you need, paying the loan back right from the start.
Benefits of the Home Equity Loan
- You get the money you need right away, which is great for large home repairs or renovations
- The interest rate remains fixed for the loan’s term
- Interest rates are typically lower than on HELOCs
Drawbacks of the Home Equity Loan
- You can’t ‘reuse’ the funds like you can with a HELOC
- You pay interest on the full amount right away
- You put your home up as collateral, which can be dangerous if you’re consolidating debt
The home equity loan and HELOC both give you immediate access to your home’s equity. Decide how you want to handle the funds. Do you have a one-time expense or will your needs be ongoing? Can you handle an unpredictable interest rate or do you need predictable payments?
No matter what you choose, you’re putting your home on the line as collateral. Make sure you can afford the payments before risking your home.