Because of the risk that a rate hike could cause payments to jump, the HELOC is better suited to small, short-term loans. It might be useful, for example, as backup for your rainy day fund, or for brief loans if your income is unsteady because it includes commissions or bonuses.
Before taking out either kind of home equity loan, though, consider refinancing your first mortgage. If you have plenty of equity – meaning the property is worth more than the balance of your mortgage – you could take out a bigger mortgage to convert some of that value to cash. Rates on mortgages are substantially lower than those on home equity installment loans, with the 30-year fixed-rate loan averaging about 4.7%.
Refinancing could be a better option for a large, long-term need. Closing costs will be higher than on either type of home-equity loan, but that may be offset by interest savings over the long run.
Of course, it’s a bad idea to use any kind of loan for non-necessities like luxury vacations or a fancy car. Many of the people who find themselves underwater today got into trouble by borrowing when they shouldn’t have.
Finally, before taking out any new loan, figure out how you’d manage if things went wrong, like if you or your spouse lost a job. In the wake of the housing collapse, it’s especially clear that it’s better to have as little debt as possible in your portfolio.
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