There isn’t just one kind of home equity loan. Several kinds of loans and interest-rate and repayment options are available. Make sure you shop for the one that’s right for you.
Second Mortgage – A second mortgage is a loan against the equity in your home. When you take out a second mortgage, you will have two active mortgages. Taking out a second mortgage might be your best option if today's market interest rates are about the same or higher than the interest rate on your current mortgage. If rates are significantly lower, you might want to reconsider refinancing your mortgage instead of taking out a second mortgage.
Refinancing – When you refinance, you are taking out a new mortgage and using the money to pay off your old mortgage. Any loan money left after you pay off your old mortgage is your home equity loan. Refinancing makes sense if you have a high-interest mortgage and can refinance by taking out a new loan at a lower interest rate. If your current mortgage already has a low interest rate, refinancing probably isn't the right option for you.
Home Equity Line of Credit – With this type of loan, you receive a special checkbook. Every time you write a check, you’re actually borrowing against your home. This option is most useful if you are using your loan to make payments on a major expense over time – paying college tuition costs, for example. Borrowers need to be very careful about taking on home equity lines of credit. NEVER use a home equity line like a regular checking account to pay for things like regular monthly bills, groceries or entertainment.
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