Twice a week, our CEO and resident money guru Jean Chatzky tackles your burning questions in the HerMoney newsletter. We’ve pulled some of the best to feature on our website — and this one made the cut! Got a question for Jean? Send it her way right here.
Q: Today’s question comes from KT. She writes: We have to redo our floors. Is a home equity loan our best option or is there something else out there? I’m new to all this!
A: It depends, KT. If it’s doable, I recommend paying in cash to avoid incurring debt. It sounds, though, like it might be too big an expense, so let’s dig into some other options.
First, the home equity loan. With a home equity loan, you’re borrowing against the equity you have in your home. The rates for these are usually lower than those for unsecured loans or credit cards. The interest you pay may also be deductible. The big downside of a home equity loan is that you’re using your home as collateral.
A home equity line of credit, or HELOC, is similar to a home equity loan. It is a revolving line of credit where you borrow against your home’s equity. It works like a credit card—you use it for what you need and pay it back as you go. With this option, the interest you pay might also be deductible. That said, there are a couple of downsides. HELOCs typically have variable interest rates (which means if rates rise, your payments rise — same if they fall). As with a home equity loan, there’s also a risk of losing your home if you can’t pay.
You could also consider a personal loan, which doesn’t require you to pledge your home as collateral. However, personal loans normally have higher interest rates than home equity loans.
Last but not least, credit cards. If you can get approved for a credit card with a 0% APR for an introductory period, and then pay the balance off before the promo period ends, this might make sense. If you wouldn’t be able to pay the balance off within the promo period, don’t go this route. Once that promo period ends, interest rates are typically high.
What option is right for you? If you have significant equity in your home and are comfortable using it as collateral, a HELOC or home equity loan might offer the most favorable terms (especially when it comes to interest rates). If risking your home makes you nervous, you may want to take out a personal loan or find a credit card with a 0% APR, so long as you can pay it off before the promotional period ends.
MORE ON HERMONEY:
- Ask Jean: How Do Reverse Mortgages Work?
- 3 Steps To Lower The Cost Of Your Homeowners Insurance Premiums Right Now
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