Need Funds? You Can Borrow from Your Home

There’s always the bank of “my home”-the equity you’ve built up in your home over the years.

Equity is the difference between what the property is worth and what you owe on it; the amount you’ll be able to borrow on the property is based on how much equity you have in it.

You have many borrowing options, but each has its upsides and downsides. Consider the following:

Home equity loan

If you borrow through a home equity loan, you keep your existing first mortgage and use the equity you’ve built up as security for a second mortgage. The loan will be paid as a lump sum with a fixed, but generally higher, interest rate, and qualifying for a home equity loan may be more challenging. However, there are tax advantages to borrowing this way; as with deductions for first mortgage interest, the IRS typically allows a deduction for interest paid on a home equity loan.

Line of credit

A line of credit usually carries a variable rate. Typically, you don’t have to take it as a lump sum, so you’re only paying interest on the money you’re using; a zero balance means that you are paying zero interest. Some lenders, however, may have minimum withdrawal requirements, meaning you may have to take a minimum initial amount or a minimum amount each time you use your credit line.

Cash-out refinance

Here, you replace your existing mortgage with another – and put money in your pocket. If your existing mortgage has a higher rate and/or payment than your proposed mortgage, you’re ahead. In any case, the interest rate is usually lower than on a home equity loan. The downside: You’re borrowing the cash portion of the mortgage for the entire term – unless you pay it off ahead of time.