If you have paid off a good portion of your house and its value has appreciated, and you find yourself in need of some extra cash, you may consider taking out a home equity loan.
Step 1: Assess your risk Assess your risk. Borrowing against your home equity depletes your investment, and reduces the cash you can take out in an emergency.
Step 2: Learn the tax rules Familiarize yourself with the tax rules governing home equity borrowing. To deduct interest you have to itemize, which cannot be done if you have too few deductions.
Step 3: Consider your borrowing options Consider your borrowing options. A home equity loan is secured by house to the extent the fair market value exceeds the debt incurred when you purchased it. A home equity line of credit is a form of revolving credit in which your equity in your home serves as collateral.
TIP: Consider applying for a reverse mortgage loan if you are at least 62 years of age and occupy the home as a principal residence. A reverse mortgage is a loan against your home that you do not have to pay back as long as you live there.
Step 4: Decide on a loan type Decide whether a loan or line of credit will best meet your needs. In general, a loan is best for short-term borrowing or when you need the money in an emergency. A line of credit is best if you want to lock in a low interest rate.
Step 5: Apply Apply for the loan or line of credit. Be careful about signing up for application or appraisal fees. If you have good credit, you should not have to pay these fees to borrow against your home. With the appropriate steps, you'll secure some cash -- and maybe even use it to increase your home's value.
FACT: Some experts estimate that less than a third of home equity borrowing is used for investments, with the rest being used for debt consolidation, vacations, or purchases that depreciate quickly.