There are numerous types of home equity loan options available to borrowers today. Figuring out which option is best for you can be a rather daunting task. The process does not have to be bewildering if you follow some general rules of thumb. The first step is to decide what specifically you need the money for. Do you need money in one lump sum or smaller incremental withdrawals? Lump sum loans are ideal for home improvement projects or other short-term needs; whereas small, incremental withdrawals are ideal for college tuition. Regardless, the first step is to figure out what you need the loan for and decide how you want the loan distributed.

Cash-Out Refinance

If you are looking for a lump sum of money, then a cash-out refinancing lump sum may be your best option. This option is when you refinance your first mortgage and cash out a lump sum of equity. Although closing costs on this type of loan may be higher, if the rates are lower than on your first mortgage you will have a lower monthly payment and long-term interest savings.

Home Equity Line of Credit

The home equity line of credit, or HELOC, can be distributed through incremental withdrawals. A HELOC has a higher interest rate than the first mortgage. With a home equity line of credit, you have a pre-set credit limit, which you can draw upon whenever, you need it. HELOCs only charge you interest on the amount that you withdraw, and the rate is usually tied into the prime lending rate. This is a popular choice if you are looking to tap into your equity over time.

Home Equity Loan

The home equity loan is another option that has a fixed rate and term. The home equity loan is also considered a second mortgage, and is subject to a slightly higher interest rate. If your mortgage is at a low rate, then the home equity loan would be a good option if you need a lump sum payment.

Once you decide on what you need the equity for and the manner of delivery, lump sum or incremental payments, it is easier to discern which loan is right for you.

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