Home Equity Loans: Which Type Is Best For You

There are several ways to borrow against equity in your home. You can refinance your mortgage and take cash back, take out a second mortgage loan, or open a home equity line of credit. Each method has its advantages; carefully evaluating the costs associated with home equity loans will help you choose the loan that will cost you the least. Here are tips to help you avoid overpaying for the home equity financing.The most common methods of borrowing against home equity are second mortgages and home equity lines of credit. Equity in your home is simply the difference between what you owe and what your home is worth. Second mortgages and home equity lines of credit are secured by your home just like your primary mortgage; if you fall behind on any of the payments the lender could take your home.Home Equity Lines of CreditA home equity line of credit works much like a credit card. The lender will issue you a debit card and a check book you can use against a predetermined limit secured by your home. The main advantage of a home equity line of credit is that it is an extremely convenient way to borrow against the equity in your home. One of the main disadvantages of a home equity line of credit also that it is a convenient way to borrow against the equity in your home; because of this convenience you might be tempted to overspend. Home equity lines of credit come with variable interest rates and many of the same fees you paid when applying for your mortgage. If you only need a small amount of equity and plan on paying it back quickly, a home equity loan could save you money over a second mortgage.Second Mortgage LoansA second mortgage differs from a home equity line of credit in that you receive the amount you are borrowing in one lump sum. Second mortgages come with fixed interest rates; a fixed interest rate can save you money and give you peace-of-mind for the long term. If you need to borrow a large sum of money, a second mortgage can save you money over a home equity line of credit.You can learn more about your home equity options including how to avoid common homeowner mistakes by registering for a free mortgage guidebook.