Three Options To Make Your Home’s Equity Work For You

If your bills are piling up, you have costly credit card debt, or you find yourself struggling to pay for large expenses, you can use the equity in your home to help your financial situation. The difference between the value of your home and what you owe on your home is known as your home's equity. For example, if you owe $150,000 on a home that is worth $200,000, you have $50,000 worth of equity in your home. Consider the following loan options to access your home's equity.

Cash Out Refinance

If you refinance your mortgage with a cash out refinance, you get cash by borrowing against the equity in your home. This option refinances your existing home mortgage. Homeowners who know they will be incurring large expenses, such as college tuition or home renovations, can use the cash to cover these large expenditures.

When you complete a cash-out refinance, you are able to borrow money at low interest rates. These interest rates are usually much lower than the rates associated with credit cards and personal loans. For example, the average credit card interest rate is 17.55 percent, If you have a significant amount of personal debt, a cash out refinance enables you to consolidate your debt at an affordable interest rate. In addition to saving an immense amount of money in interest, you can also decrease your overall monthly debt payment and have the convenience of only making a single payment each month.

One of the benefits of a cash out refinance is that your interest expenses may be tax deductible, decreasing your overall tax liability. The interest associated with credit cards and consumer loans is not tax deductible.

When you refinance, you can choose from a number of loan products, such as fixed rate mortgages and adjustable rate mortgages. Fixed rate mortgages offer greater payment stability, while adjustable rate mortgages have an introductory period that allows you to take advantage of extremely low interest rates.

Home Equity Loan

A home equity loan is another common option for homeowners who want to borrow against their home's value. This loan product uses your home as collateral. You do not have to refinance your primary mortgage in order to obtain a home equity loan. Like mortgage interest, home equity loan interest may be tax deductible.

Your home equity loan is for a specified term that usually varies from 5 to 15 years. Your interest rate is also fixed, so your payment will remain the same for the entire loan.

Home Equity Line of Credit

A home equity line of credit is similar to a home equity loan, but the terms differ. Instead of taking out a fixed loan, you draw against the line of credit as needed. Your payment fluctuates because it depends on the credit line's terms and on prevailing interest rates. Interest expenses may be tax deductible.

Turn to the equity in your home to help pay large expenses, consolidate your debt, or get extra cash. With a bit of research and some professional advice, you can find the option that makes sense for your financial needs.