Updated: Jun 18, 2019
If you've been a homeowner for some time, you most likely have built up equity in your home that could be used to pay for other expenses. To take advantage of this equity, you may be able to take out a home equity loan that offers a lower interest rate than other loans. Then, when you sell your home, this amount will be paid off with the profits. While getting a home equity loan offers the opportunity make smart investments, the funds should be spent wisely and only on activities that will improve your financial situation or prevent hardship. Here are four good reasons to apply for and use a home equity loan.
Make Home Improvements
If you use your home equity funds to make home improvements that add value to your home, you can make more money when you sell it. This makes it a good investment. Be advised that not all home improvements add value to a home so choose wisely.
Consolidate Debt and Lower Payments
If you are paying high interest on credit cards or other loans, a home equity loan can lower your interest rate and payments to make them more reasonable. Because home equity loans are backed by the collateral on your home, they usually have much lower interest rates than credit cards.
Pay for College
Another great use for a home equity loan is to pay for college. It's generally a good investment because most likely you will be able to increase your income with a college degree. However, we do offer a word of caution. Be sure to choose your degree carefully as some degrees make it harder to find a job and lead to careers that pay less money. Do your research about which careers will lead to a salary that can support paying off your home equity loan.
Cope with an Emergency
A home equity loan can provide the ability to obtain quick cash in case of an emergency until you have saved up enough to have an adequate emergency fund. While paying for an emergency isn't an investment, it does offer protection and security.
Bad Reasons to Use a Home Equity Loan
While a home equity loan can be a smart move, there are some things you shouldn't use it for. For example, you shouldn't buy luxury items, clothes, electronics, vacations or cars. It's also not wise to spend it on groceries, gas and other household expenses. Those items should be covered in your monthly budget.
To decide which items or services make the cut, ask yourself if they will make you more money after you buy them. If not, then don't use the loan money for them.
If you're interested in getting a home equity loan, you'll want make sure that you don't borrow more than 80 percent of your equity so you leave some room for the market to fluctuate, to pay a realtor when you sell and to put a down payment down on your next house. If 20 percent isn't enough to cover those items but the lending institution gives you the loan for that amount, set a limit on your spending and only use the remaining funds in case of an emergency. In a nutshell, a home equity loan can be a very smart move. However, it needs to be approached with caution and a good understanding of how the money should be spent.
If you would like more personal advice and specifics on how a home equity loan works, give us a call at (210) 223-6561.