Your home is likely one of your most valuable assets. Tapping into that value, though, can be difficult if you’re not willing to sell. If you need money, one of the best ways to take advantage of that asset is to tap into your home’s equity.
What Is Home Equity?
The equity you have on your home is the difference between the amount you owe to pay off your mortgage and the actual value of the home. If your home is valued for $300,000 and you currently owe $200,000 on your mortgage, for example, you have $100,000 in equity.
What Is a Home Equity Loan?
A home equity loan is a traditional installment loan taken out against the equity that you have in your home. You’ll borrow the money once and receive it in a lump sum, and then begin paying it back at a fixed interest rate. This is essentially a second mortgage on your home, one that’s secured against your equity.
What Is a Home Equity Line of Credit?
A home equity line of credit (HELOC) is a type of loan that works a bit more like a credit card. This loan gives you a set amount of credit that you can use during a specific period of time, and you can continue to draw on it as needed until you hit the repayment period. During the initial period, called the draw period, you’ll be able to pay back interest. During the repayment period, which is substantially longer, you can no longer take out money but must repay the interest and principle.
Which One Works Best?
The answer largely depends on your financial needs. A home equity loan tends to make sense for those who know that they’re going to need a single loan for a specific purpose and want to know exactly how much they’re going to have to pay every month until the loan is paid back. A HELOC, on the other hand, tends to be a better fit for those who want access to the equity in their home but don’t necessarily need the lump sum payment. HELOCs tend to provide less financial certainty over the long term but offer much more short-term flexibility.
Choosing between these types of products really depends on your situation. If you’re going to do a big project or need a larger sum of money today, a home equity loan makes sense. If you know you need access to revolving credit over time, though, a HELOC makes more sense. Regardless of your choice, tapping into your home’s equity can be a great way to make big purchases or solve financial issues.
