When is a Good Time to Take Out a Home Equity Loan?

Home equity loans are ideal for many reasons. Depending on your needs, a home equity loan might be the ideal way to go if you need to pay for a major expense.

There are rules, however, for taking out this type of loan, so it is important to have a clear understanding of them before getting started. Moreover, depending on your situation, certain times might be more appropriate than others for borrowing this amount of money.

Here are some general guidelines to keep in mind when it comes to taking out a home equity loan.

Reasons to borrow through home equity

Not only are home equity loans a secure way to borrow money, but they are also a great loan option to go with because of their favorable interest rates. Some people use home equity loans to pay down debt, such as vehicle payments, credit card payments or even student loans, while others prefer to use the influx of cash to undertake home improvement projects and updates, like remodeling a kitchen, replacing a roof or overhauling HVAC systems.

Though these are some common options, you can use your home equity loan for whatever you wish. Once you’re approved for the loan, the choice of what to do with the money is yours to make.

When to take out a home equity loan

When you’re a new homeowner, it is generally not recommended that you tap into your home’s equity right away, though it is possible to do so. The best time to borrow is when the home is close to being paid off. The closer you are to having your initial mortgage repaid in full, the more favorable your home equity loan can be with respect to interest rates and deadlines. By this point you will also have had more time to put natural wear-and-tear into your home, so you are more likely to have good uses for the money as well.

This aside, however, there is no general rule of thumb for when to take out a home equity loan; your own unique circumstances will help determine when is best for you. If you need the money, if you have equity in the home and if you feel comfortable enough to borrow, it may be the right time for you. Meeting with your local community bank and lender for an initial consultation can help you create a plan tailored to your unique situation.

Ways to borrow on equity

While home equity loans are popular, there are a couple of variants on equity-based credit that are also available:

  • Cash out mortgage refinance: This type of loan is similar to a standard mortgage refinance, except that the borrower refinances for more than the amount owed, making these function like a home equity loan. These have variable rates, but you will have to pay closing costs and sort out an assortment of other factors, much like when getting a new mortgage.
  • Home equity line of credit (HELOC): Similar to a home equity loan, a HELOC makes a pool of credit available to you, rather than dispensing a fixed amount of cash via a loan. These have low rates but can climb over time, making the payments more expensive.
  • Home equity loan: These have fixed rates and the payoff period is generally between 5 to 15 years.

Your mortgage lender is able to provide even more information regarding your home’s equity and how you’re able to maximize the benefits that come with borrowing from it. Your lender can provide you with more information not only on the process, but also on the smartest route to take, since there are multiple ways to borrow from your home’s equity.