People tap into their home equity for a variety of reasons, with the two most common reasons being consolidating debts and making home improvements.
The question is whether you should take out a home equity loan (second mortgage) or a home equity line of credit (HELOC).
Each has its benefits and drawbacks.
Some of the advantages of both home equity loans and home equity lines include lower interest rates and potential tax savings, and both offer interest only payment options in case you are short on cash.
With a home equity loan, you get a lump sum at the beginning of the loan that you start paying back immediately.
A HELOC gives you a revolving, variable interest rate credit line that you don't start paying back until you start using the line of credit.
According to the Federal Reserve, home equity lines of credit annual percentage rates (APRs) are based solely on a publicly available index (such as the prime rate published in the Wall Street Journal or a U.
S.
Treasury bill rate).
However, it is an adjustable rate mortgage (ARM) loan.
With rising interest rates, they've gotten a lot more expensive, doubling to 8 percent in the past three years.
The Federal Reserve states that APR for traditional second mortgage loan takes into account the interest rate charged plus points and other finance charges.
However, because you are paying a fixed home equity rate instead of a variable rate, your payments will be the same throughout the life of the loan, which makes financial planning because the payments won't fluctuate with interest rate changes.
Which loan you choose depends on your individual financial circumstances.
A HELOC can be useful for people who need fluctuating amounts of money to pay recurring expenses or a short-term financial backup plan, but may not be the best choice for someone interested in long-term debt consolidation or someone who needs a set amount for a specific purpose, such as a home addition.