April 20, 2024

Empowered CG

Creating Home Magic

Choosing the Right Home Equity Mortgage For Your Situation

If you have equity in your home, you can take out a home equity mortgage to get that cash. You will have several options to choose from and what you need it for will determine which option you choose.

In addition to the fact that the interest rate on a home equity mortgage will be substantially lower than any rate you can get through your credit card or other unsecured loan, loans of up to $100,000 often have the benefit of being tax deductible (check with your tax advisor.) But since you have more than one choice, you want to be sure and use the one that is most advantageous for you.

Home Equity Line of Credit

A home equity line of credit, or HELOC, is where you have access to any amount of your approved equity. You will get a book of checks and can write out checks as you need them. The benefit to the HELOC is that you only pay interest on what you have actually used, not on the amount you have been approved for. The interest rate for your line of credit will be a little above the prime rate so it can fluctuate on a regular basis, which is good when the rates are going down but bad when interest rates are rising.

Many HELOCs will have an interest-only feature to them which means that for a specified time, the minimum amount you are required to pay may be quite low. While this may seem like a nice feature, you will not be rebuilding any equity. When the interest-only period ends, you will need to increase your payments substantially in order to start repaying the amount you borrowed.

Home Equity Loan

The home equity loan is, in essence, a second mortgage which will have a fixed interest rate and you will receive one lump sum payment. Your monthly payments will be based on the term of the loan which is usually 10 or 15 years. If you will be doing some home renovations or debt consolidation, this would be the way to go.

While the payments initially would be higher on the home equity loan than on an interest-only HELOC, the loan provides a much more disciplined manner of repaying your home equity mortgage than the HELOC does. Regardless which one you choose, try to pay more than the minimum each month so that you are constantly reducing the loan principal.

Of course, just because you have equity built up in your home is no reason to take it out. Being totally debt-free would be even better and then you could just save for a few months and have the money to pay cash for anything you might previously have taken a home equity mortgage for.