Are you looking at ways to pay for a summer vacation? One option to consider is a home equity loan or line of credit. As you make monthly payments on your mortgage — and as home values keep going up — the equity in your home builds. Equity is the current market value of your home minus the amount you owe on your mortgage.
Using your home equity as a source of credit for a vacation or any number of other uses offers potential advantages:
- Interest rates are typically lower than for most other forms of consumer credit.
- It can be a huge source of borrowing power if you have a lot of equity.
- You can generally use the money for any purpose you choose.
Keep in mind, though, that using your home equity also has a potential downside: Inability to repay could result in losing your home. Because a home equity loan or line of credit is secured by your home's value, you'll want to keep the amount you borrow in check.
2 ways to borrowYou can choose from two options for using your home’s equity:
1. Home equity loan. Sometimes called a second mortgage, a home equity loan allows you to borrow a lump sum to be paid back in monthly installments over a specified period.
2. Home equity line of credit. Rather than receiving a lump sum, this option lets you borrow against a given credit line as you need it. You can access your money by writing checks linked to the account. Just as with a credit card, as the line is repaid, the money becomes available for you to borrow again.
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Other great ways to use your equityUsing your home equity can be a good solution for many financial needs. Explore these uses for your home equity:
- Consolidate high-interest debt. Maybe you suffered a financial setback such as a job loss or major illness and ended up using your credit cards to pay bills for everyday essentials. Now you’ve recovered from the setback, but still have a pile of high-interest credit card debt. Using a home equity loan or line of credit can be a smart way to pay off the debt more quickly and at a lower cost.
- Pay college tuition bills. A home equity line of credit may be less expensive than certain types of education loans, and the amount you can borrow is only capped by how much equity you have. Be sure you’re not endangering your own retirement savings to pay your child’s college costs, though.
- Starting a business. If you need to raise capital, a home equity line of credit is an easily accessible, affordable option. But be sure you’ll be able to pay off the debt if your business fails.
