Want To Start A Small Business? 4 Things To Consider Before You Dip Into Your Home's Equity

On average, it takes approximately $30,000 to start a small business. Of course, the cost can vary dramatically, depending on the type of business you wish to start. You may open your business for much less or a lot more. Regardless, you will have to find some way to fund your business. You can pull from savings, ask a family member, take out a small business loan or pull equity from your home. If you decide to do the latter, you should consider these four things.

Interest Rates Are Lower

Interest rates for home equity loans are generally lower than interest rates for other types of loans, including small business loans, personal loans and revolving lines of credit. However, you will pay slightly more interest for a home equity loan than you do for your mortgage. If you must keep your lower interest rate, you can always refinance your home, but you will pay more in closing costs. 

There Are Two Types of Equity Loans

There are two main types of home equity loans: a standard loan and a home equity line of credit or HELOC. If you take out a standard loan, you will receive a lump sum payment equal to the entire amount that you borrow, less expenses and fees. A HELOC line of credit on the other hand remains in an account that you can draw from when you see fit. With the latter, you usually have a period of time before you enter repayment, and you're only responsible for the amount you actually spend. 

You Must Have a Certain Amount of Equity

To obtain a home equity loan, you must have equity in your home. Most banks won't extend an equity loan unless you have more than 20 percent equity in your home. What's more, they usually don't want to lend more than 80 percent of the total value of your home. 

You Can't Borrow a Small Amount

Most home equity loans come in large amounts. In many cases, the lowest amount you can borrow is around $10,000. If you're not sure how much you will actually need, you may want to apply for a HELOC loan instead so you can utilize your equity in smaller amounts. 

Borrowing money against your house is a serious matter. If you're not sure what your best option is for financing your business, talk to your financial planner or a loan specialist like General Electric Credit Union .