As home prices continue to climb, home equity loans and lines of credit are becoming potential sources of extra cash for a growing number of homeowners. But tapping the value of your home is something that should be done very cautiously and for a very narrow set of reasons. A decade ago or so, way too many homeowners were using heloc to purchase investment property cash out of their homes like they were bottomless piggy banks to fund affluent lifestyles they couldn’t really afford.
Those reckless borrowers paid the price when the housing bubble burst, property values plunged and they lost their homes. So, if you’re thinking about taking out a home equity loan or line of credit today, take a savvier, conservative approach. Our 4 smart moves for using home equity will help get you started. Choose the type of loan wisely. A HELOC works more like a credit card. It makes a certain amount of credit available on an as-needed basis for a limited term, such as five or 10 years, followed by a repayment period of up to 20 years.
It has an adjustable rate that changes with the market. A home equity loan makes sense if you need a large amount all at once for a specific project. A HELOC might make more sense if you need to borrow smaller amounts over a longer period. You might be tempted to choose a HELOC because of its lower interest rate. But since today’s interest rates have almost nowhere to go but up, a HELOC’s variable interest rate could end up costing you much more over the loan term than a home equity loan’s fixed rate, even though the fixed rate is higher initially.