There are several ways to tap your home’s equity. One is to take out a home equity line of credit (HELOC). A credit line will have a variable interest rate, but you pay interest only on the amount you use. Ideally, you should draw from your credit line and then pay some or all of the balance before drawing against the credit line again.
A home equity line is often less expensive than higher-rate borrowing options such as credit cards – and the interest may be tax deductible.*
A second option is to take out a fixed-rate equity loan. Most equity loans can have rates slightly higher than an equity line because the minimum payment often includes both interest and principal. Payments are also calculated on the total loan amount, as opposed to just the portion of an equity line you’ve drawn down. The big advantage of a loan is the rate is fixed for the duration of the loan, as are your monthly payments. And like a line of credit, interest can be tax deductible.*
A third way to tap your home’s equity is a cash-out refinance of your first mortgage. In this option, you refinance your first mortgage for more than you currently owe, providing you with available cash. You will end up with a larger mortgage and monthly payments, but the interest may be tax deductible.*
Whichever option you choose, use the equity in your home wisely. Always consider that your home is primarily your shelter. Risking your shelter by using it to make unwise purchases or investments can be detrimental. On the other hand, using some of your equity can also make a lot of financial sense for you. Choose wisely.
*Always consult a tax advisor on the deductibility of interest.