Different from a home equity loan, a cash-out refinance replaces your existing first mortgage. You may have lower rates than with a home equity loan but you pay closing costs, just like you would on any refinance, and you'll have to pay private mortgage insurance "if you end up borrowing more than 80% of your home's value." If your interest rate is much higher than going rates and you know you have a good amount of equity, it might make sense to do it. But if you have terrible credit, your rate might not get much better. And, you'll have to decide whether refinancing and going back to square one with a mortgage is worth it.
"If you're going to make payments for 15 or 30 years, it makes sense to spend the money on something lasting, like an addition to the house that will increase its value, potentially lifesaving experimental medical treatment that your health insurance won't pay for or to start a business," said Bankrate. "Do you want to spend 15 years paying for your month-long dream vacation? Do you want to spend 30 years paying for items that you don't even remember buying, but are still paying for?
3. It's hot outside. And it's hot in the real estate market and you want to take advantage of both and decide to build a pool. So, you'll just get a home equity loan or a line of credit. What's another couple bucks a month?
But, you should know a home equity loan is a separate loan on top of your first mortgage that's paid out in a lump-sum and is paid back in fixed monthly installments. An equity line of credit is a specific amount you can borrow against your home. Both will require you to have sufficient equity in the home, which will be determined by the bank.
The home equity loan is a fixed rate, while a home equity line of credit "typically fluctuates with the prime rate," said US News. "Remember that with a home equity loan, you are paying interest on the entire amount of the loan, whether or not you are using the proceeds. With a home equity line of credit, you only pay interest on the amount you borrow."
The loan usually has higher rates than a cash-out refinance, but interest is a tax write off and may be a good option for someone whose "current mortgage is at a lower interest rate than you could get now by refinancing," said Bankrate. And if the money loaned is being used to improve the home and not improve your wardrobe, or other unnecessary items all the better. "The best use for home equity is to buy things that will contribute to your home's value, like a needed remodel, or your family's future income, like a college education,"said Houselogic. "Consider carefully before you cash in home equity to spend on consumer goods like clothing, furniture, or vacations.
Use a home equity line of credit for improving your home or buying other properties or land. These are long-term appreciating assets and will help you preserve your wealth.
Avoid worsening your financial situation by poor use of the home equity line of credit. Don't squander your equity on consumer goods, vacations and daily living expenses, as paying it back will be difficult.
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Lang Premier Properties are Birmingham Realtors specializing in Oakland County Real Estate. Stephanie is an agent with Max Broock in Birmingham, Michigan. See what past clients have to say about Stephanie Lang. Lang Premier Properties looks out for your best interests when you purchase a new custom luxury home. We always recommend working with an experienced luxury real estate agent when buying a new luxury estate.