Home Equity Loan: Best Option?

Thinking about tapping into your home equity with a loan?

Which way is best?

There are several options and a few things to consider when deciding which is right for you.

If the interest rate on your home mortgage is higher than current rates, it may make better sense to refinance and take a lump sum of cash from your equity. You'll simply refinance your mortgage to a larger loan amount and take the difference in cash.

Home Equity Loan

A home equity loan is essentially a second loan that you take out in addition to your first mortgage. Commonly referred to as a "second mortgage," a home equity loan allows you to tap into your equity to get cash without refinancing your first mortgage and usually in a lot less time. A home equity loan is a good choice if you'd like your cash in a lump sum and have a great rate on your first mortgage.

Home Equity Line of Credit

A home equity line of credit, on the other hand, is very similar to a credit card except that it uses the equity in your home as the revolving line of credit. You pay only if and when you use the money. But, unlike credit cards, the interest is usually tax deductible. (See your tax advisor for particulars.)

You can get a lump sum at closing or only part of your money and draw on the rest when you need it. Unlike a home equity loan or a refinance, you can get a home equity line of credit in as little as ten days. An equity line is a good choice if you'd like ready access to your equity.

Exercise Caution

Watch for inappropriate conduct by home equity lenders, including the following:

Bait and Switch: The lender offers one set of loan terms when you apply for the loan, attempts to impose higher charges when you sign to complete the transaction. Such a lender may attempt to distract you from the terms of the contract, to use pressure tactics to get you to sign or prevent you from reading its terms, or may even misrepresent what the contract says.

Equity Stripping: The lender gives you a loan based on the amount of equity in your home, even though you will find it difficult or impossible to make the loan payments given your income. If you are unable to make your payments you may lose your home.

Credit Insurance Packing: The lender adds credit insurance to your loan, perhaps at a substantial cost, even though you may not want or need credit insurance. If you need credit insurance, consider applying for coverage through a source other than the lender.

Loan Flipping: The lender encourages you to repeatedly refinance your loan, perhaps also encouraging you to borrow additional funds each time you refinance. Each time you refinance the loan you pay additional fees and points which profit the lender, but also increase your debt.

Deceptive Loan Servicing: The lender provides inaccurate, incomplete, or misleading account statements and payoff figures. As a result, it is extremely difficult for you to determine how much you have paid or how much you owe, and you may end up paying more than you actually owe.

Rising home prices can give your financial situation a terrific boost. However, tapping your home equity via loan or line of credit has risks. If something were to happen to you that made repaying your loan impossible, you could lose your home.

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