Before you commit to a home equity line of credit or loan, you’ll likely have a discussion with a lender to help you sort through some of the nuances in the tools. Prepare yourself for the conversation by thinking through the questions below.
What plans do you have for these funds and when do you need them?
It’s important to determine if there’s an immediate need or a future need for the cash. It’s the difference between taking out a line of credit or a loan.
Do you prefer a fixed or fluctuating payment?
A line of credit may come with a lower interest rate, but it’s variable, so your payment will always be changing. Whereas with a home equity loan, you can lock in your terms with a fixed interest rate. If you are comfortable knowing that your payment might fluctuate, then a line of credit could be for you.
Do you need access to the equity in the future?
When you take out a home equity line of credit, you can think of it as a revolving line. That means the funds are always there for you to use as long as you continue to pay it back.
Are you looking for one lump sum of cash, right now?
A home equity loan will be disbursed to you in one lump sum. That means you’ll have a lot of cash, all at once, to use how you need to. Simply pay back the principle and interest of what you spent over the term of the loan.
How much debt do you have? Are you living beyond your means?
If your answer is “yes, I have debt and live beyond my means,” a home equity tool may still be useful if your goal is to consolidate debt. A lower interest rate could free up cash for other monthly payments. Be careful: It’s tempting to use equity to further spending habits. So, make sure you take the time to reflect on the real reasons why you’re considering a home equity tool.
Are you aware of the fees associated with the tools you’re interested in?
Be sure to ask your lender about any fees associated with the home equity tool you choose. You’ll often have to pay closing costs, origination fees and more, depending on the type of product you choose.