Home expenses can range from routine upkeep like paint, air filters or smoke alarms, to major repairs and improvements. For larger costs, borrowing may be the right move.
Before choosing how to pay, consider the amount you need, when you'll need it and what repayment will look like.
Four Questions To Ask First
- How much money do you need? You may be able to cover a smaller expense from savings or pay it off quickly without taking out a loan.
- Will the costs happen once or over time? A one-time expense with a known price may work better with a lump-sum loan. A project with costs that come up in stages may call for access to funds over time.
- What payment can your budget handle? Compare the monthly payment, rate, fees and total amount you'll repay, not just the amount you can borrow.
- Are you willing to use your home as collateral? Home equity borrowing may offer a lower rate than other types of borrowing, but missed payments could put your home at risk.
Compare Your Borrowing Options
Start with the expense: Is it a one-time cost with a known amount, an ongoing project or a smaller purchase you can repay soon?
| Borrowing choice | Works best for | What repayment looks like | Costs of borrowing |
|---|---|---|---|
| Home equity line of credit | Ongoing or unexpected expenses when you need the flexibility to access funds as needed. | Borrow and repay funds as needed during the draw period; payments may increase when amortized repayment begins, meaning you begin repaying both principal and interest. | Variable rate; fees may apply. |
| Home equity loan | A larger expense when you know exactly how much you need. | Receive a lump sum; payments are typically fixed. | Fixed rate; fees may apply. |
| Personal loan | A major purchase, unexpected expense or other cost when you know the amount needed. | Receive a lump sum with a fixed payment and payoff date. | Typically a fixed rate; fees may apply. |
| Credit card | A smaller expense you can repay quickly. | Use available credit as needed and reuse it as you repay. | Variable rate; interest adds up if you carry a balance. Review promotional terms carefully, especially deferred interest offers. |
Compare the Offers, Not Just the Products
When you borrow, the rates, terms and costs depend on the lender and your qualifications. Some loans and credit products don't have fees to open, maintain or use the account, so review each offer rather than assuming a fee applies.
Be sure to compare the Annual Percentage Rate, whether the rate can change, the monthly payment, the repayment term, the total amount you'll repay, including interest, and any applicable fees. For a personal loan, check whether an origination fee will be deducted from the amount you receive. Also consider whether the debt is secured by your home and how easily the payment fits your budget if your circumstances change.
A Note About Taxes
Interest on a home equity loan or line of credit isn't automatically tax deductible. It may be deductible when the money is used to buy, build or substantially improve the home that secures the debt, subject to Internal Revenue Service rules and limits. Interest on funds used for personal expenses, including paying credit card debt, generally isn't deductible. Ask a tax professional how the rules apply to you.1
There isn't one borrowing choice that works best for every situation. The right fit is the offer that meets your needs at a cost and payment you can manage. Review the details, ask about anything that isn't clear and compare more than one offer before deciding.
All loans and credit cards are subject to approval. Rates, terms, fees and product features vary and may change. Home equity loans and lines of credit are secured by your home. Consult a tax professional about your individual circumstances.
- This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.