Any equity you tap is borrowing capacity that won’t be available later and less cash in hand when you eventually sell,” McBride says. “This is borrowing, which must be repaid with interest, and it puts your single largest asset on the line in the event of default. “Tapping home equity should be reserved for major, one-time expenses such as large renovations or repairs, like a new roof,” says Greg McBride, chief financial analyst at Bankrate, CNET’s sister site. It’s important to be prudent with your home equity funds and use them primarily for your home renovation. Receiving a lump sum of cash with no restrictions could tempt you to spend extra money or complete extra renovations, but you don’t want to be on the hook for paying back money you don’t need in the first place. Best ways to use your home equity responsibly If you can’t afford your monthly payments, you could lose your home - this is the biggest risk when borrowing with either type of loan. That means your monthly payment is subject to change as rates rise.īoth home equity loans and HELOCs use your home as collateral to secure the loan. You’ll only pay interest on the cash you’ve borrowed during the draw period, but, usually at a variable rate. In contrast to home equity loans, HELOCs offer a revolving line of credit to tap as needed - much like a credit card. The other option when it comes to tapping your home’s equity is a home equity line of credit, or HELOC. In a rising interest rate environment, it may be easier to factor a fixed payment into your budget. That fixed interest rate means your monthly payment will be consistent over the term of your loan. With a home equity loan, you borrow a set amount of money and pay it back over time, typically at a fixed interest rate.
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