Alternatives to a home equity loan
A home equity loan isn't your only option when you need cash. Another option to consider is a home equity line of credit (HELOC), which gives you access to money that you can tap during a predetermined draw period. The upside of this route is that you're not committing to borrowing the entire sum, so you don't automatically have to start paying interest on it. This can avoid lots of unnecessary fees.
Imagine you're looking at what you think will be a $30,000 home repair. If you take out a $30,000 home equity loan, you'll be on the hook for interest on that entire $30,000. However, if you secure a $30,000 HELOC, but your repair only winds up costing $25,000, you'll avoid paying interest on the remaining $5,000 (assuming you don't borrow it for another purpose).
Another route you can take when you need money is a cash-out refinance. This involves refinancing your mortgage to a new loan -- ideally, one with a lower interest rate. But you borrow more than the sum of your outstanding home loan balance. That way, you get the difference in cash and use that money as you please.
For example, if you owe $150,000 on your mortgage but do a cash-out refinance, you might take out a new loan worth $180,000. The first $150,000 of that will replace your existing mortgage balance, but the remaining $30,000 can be given to you so you can use it immediately.
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Is a home equity loan right for you?
Because there are pros and cons to taking out a home equity loan, your best bet may be to price out a few different financing options with the best mortgage lenders in your area, calculate your monthly payments, and see which makes the most sense.
If you have a steady job and borrow a reasonable amount against your home, the concern of falling behind on those monthly payments and losing your home may not be so pressing, in which case a home equity loan or mortgage refinance could be your most affordable ticket to accessing the cash you need. Weigh your options carefully before rushing to sign those papers.
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