3 Ways to Use Your Home Equity
When you own a home, you have the opportunity to build equity. Home equity is the portion of your home’s value that you own—it’s the difference between your home’s appraised value and your outstanding mortgage balance(s). As you make payments on your mortgage, you increase your ownership stake in the property. And as your home’s value increases, typically through appreciation, your equity increases as well.
You may want to access the value in your equity for a number of reasons, such as paying for home improvements, consolidate debt, or pay for major expenses like tuition. When you need money, you have a few different ways to access the value in your home equity: taking out a home equity loan, getting a home equity line of credit (HELOC), or selling your home outright. Each option has its own set of pros and cons that you should consider before making a decision.
Home Equity Loan vs. HELOC vs. Selling
When you take out a home equity loan, the lender gives you a lump sum of cash, and you repay the loan over time with fixed monthly payments. A HELOC works differently. With a HELOC, you’re approved for a certain amount of credit, but you don’t have to use all of it at once. You can draw on the line of credit as you need it, and you only pay interest on the amount you borrow.
Selling your home outright is another way to access the value in your equity. With this option, you sell your home and use the proceeds from the sale to pay off your mortgage and any other debts you may have. You then keep the remaining cash.
Before you decide which option is right for you, there are a few things to consider.
First, think about how much money you need. If you only need a small amount of cash, a home equity loan or HELOC may be the better option. These types of loans typically have lower interest rates than personal loans or credit cards.
Next, think about how soon you need the money. If you need the money right away, a home equity loan or HELOC may be the better option. With these loans, you can typically get the money within a few weeks. If you sell your home, it could take months to complete the sale.
Finally, think about how long you need the money. If you need the money for a short-term project, a home equity loan or HELOC may be the better option. These loans typically have terms of 5 to 15 years. If you sell your home, you may have to rent until you’re ready to buy another one.
The Bottom Line
Before you decide whether to take out a home equity loan, get a HELOC, or sell your home, it’s important to understand the pros and cons of each option. Carefully consider your needs and decide what’s best for you.