Home equity questions to have the answers to

Your home equity can be a great source of funding for a wide variety of costs. By tapping into this equity by using a home equity loan or home equity line of credit (HELOC), you can finance everything from emergencies to retirement costs — often at rates much lower than other products.

But, as with any financial product, it's important to know what to look for. That's why we've outlined some important questions to ask yourself when evaluating your home equity options.

Check out today's home equity rates to see how much you could borrow.

Home equity questions to have the answers to

To get the most from your home equity, be sure to ask yourself these questions.

How much equity do you have?

How much equity you can borrow depends on how much you currently have. You can calculate your home equity by subtracting your outstanding mortgage balance from the current value of your home.

Let's say, for instance, that your original mortgage balance was $250,000. You've made $100,000 in payments, so the balance is now $150,000. Meanwhile, your home's value has gone up to $300,000. That means your home equity is $150,000 (or $300,000 minus $150,000).

You can typically borrow up to 85% of your home equity. So, in this case, you might be able to borrow up to $127,500.

If you don't need funds immediately, you may be better served by waiting until you've paid off more of your mortgage, home prices are higher or both. This will increase your home equity and, therefore, how much you can borrow.

Compare home equity options online now to find the one that's best for you.

Why do you need the funds?

While you can use a home equity loan or HELOC for any purposes, you may qualify for a tax deduction if you use it for IRS-approved home repairs and improvements.

"Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer's home that secures the loan," the IRS says. "The loan must be secured by the taxpayer's main home or second home (qualified residence), and meet other requirements."

So, if you're using a home equity loan or HELOC to make home repairs or improvements, be sure to save not only your loan paperwork but also any documentation proving how you used the funds. And consult a tax professional if you're not sure whether your planned improvements will qualify for a deduction.

When do you need the funds?

Considering when you need to access funds can help you determine whether you should get a home equity loan or HELOC.

A home equity loan is better when you need a large sum of money right now, such as to pay medical costs or consolidate debt. You'll begin paying the loan back immediately, incurring interest on the full amount of the loan. However, you'll enjoy fixed payments, which can make budgeting easier and protect you if interest rates rise.

A HELOC is better when you want ongoing access to money as needed, such as to pay for a child's college education costs. You'll have a variable interest rate, but you'll only pay interest on the amount you borrow, not the total credit line. Plus, you'll only begin repaying once the draw period ends (draw periods typically last five to 10 years).

View current home equity rates here!

The bottom line

Both home equity lines and HELOCs can be smart ways to pay for expenses using the value you've already built in your home. By asking yourself the above questions, you can determine which is better for you and make the most of your funds. Once you know the answers, take a look at our picks for the best home equity loans and HELOCs.