These 3 questions can help you decide between a home equity loan and a HELOC. help

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Many people have a lot of equity in their homes, either because they paid off their mortgage loan or because the property’s value has risen dramatically in the last year or so.

Some homeowners may want to tap into the equity in their home and use that money to fund other things, such as home rentals. And if you’re one of those owners, you have two options for accessing your equity: a home loan or a line of home equity.

Answering the following questions can help you decide which option is best for you.

1. Do you know exactly how much to borrow?

In some cases, you may want to borrow a certain amount of money for a specific purpose. In other situations, you may not be sure exactly how much money you will ultimately need from your lender.

If you have a certain amount that you’d rather borrow, consider a home equity loan. This loan gives you a lump sum and you cannot borrow more than that amount. Receive the borrowed money all at once, start paying after receiving the loan, and know your repayment obligations in advance.

If you know you need to borrow but aren’t sure how much, then you are better off with a home equity line of credit or HELOC. That’s because a HELOC lets you borrow up to a certain amount of money. You can borrow as little or as much as you like at any time, up to the lender’s maximum line of credit.

2. Do you have to borrow several times?

When you take out a home loan, you get all of the money you are borrowing at once. This works well when you want to get a loan for a specific purpose. However, if you prefer more flexibility, a HELOC might be a better fit. With a HELOC, you can borrow up to the maximum amount, and when you repay the borrowed amount, the credit is available again. The HELOC works like a credit card – both are revolving credit lines. But it usually comes with a much lower price than a credit card.

3. Do you prefer a fixed or variable rate loan?

With a home equity loan, you will typically choose a fixed or variable rate loan. If you prefer a fixed rate loan, a home equity loan is a better choice than a HELOC. A fixed rate loan offers more predictability because your borrowing costs do not change.

HELOCs, on the other hand, are usually floating rate loans, so you run the risk of a rising interest rate. You may be willing to take this risk in order to get the flexibility of HELOCs – but carefully consider the answers to all three of these questions so you can decide which loan option is best for your situation.

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