Home Equity: How to Use It

Financing

Thinking about using your home’s equity? Here are a few ways you can tap into that money.

Refinance Your Home

This is a way of paying off your current mortgage and getting cash out based on how much equity (the difference between the market value of your home and what you owe on it) you have in your home. Refinancing can be a great way to lower your mortgage interest rate.

Remember that on refinances, you might have to pay closing costs. discount points, appraisal fees, application fees, recording fees, and miscellaneous other charges. Always ask your lender about additional fees.

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Securing a Home Equity Loan

A home equity loan, a.k.a. a second mortgage, is good for homeowners who don’t need as much cash, and whose mortgage interest rate is already competitive. The term is much less than a conventional 30-year mortgage; usually 5 to 15 years. Home Equity installment loans are paid out in one lump sum, so they’re good for paying off credit cards or remodeling projects, even buying a new car.

You must be sure you will be able to pay the equity loan back, because it’s easier to foreclose on a second mortgage than on a federally insured first mortgage. Learn out about closing costs & points in advance, as well as balloon payments, hidden fees, or credit or property insurance tacked on to the loan.

Getting a Line of Credit

A home equity line of credit works like a credit card – you agree to a pre-set limit and then borrow as needed. These lines of credit are good for debt consolidation, major home improvements, college tuition, and unexpected expenses. The beauty of the line of credit is, you don’t make payments unless you use the money, but you have the security of knowing money’s there if you need it.

Some credit lines may have variable interest rates, with no cap on how high they go. Be sure to read the fine print and find out exactly how much it could increase. If you’re an impulse buyer, this may not be a wise choice. A home equity line of credit shouldn’t be used for frivolous items, unless it’s a one-time purchase and not a pattern of behavior.

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