Smart Use of Your Home Equity

Smart Use of Your Home Equity

Are home equity loans good debts or bad debts? Is it OK to tap your home equity for some needy funds? A home equity loan certainly is for disciplined people who will use the money wisely (not for vacations or a wild spending spree in Las Vegas). If used wisely, it can be a smart tool of debt consolidation or a sound investment. However, if you use it just to get a temporary relief from imminent financial obligations and then fall deeper into debt, you will be risking yourself to lose your own home. Many financial advisors will warn you not to take out such a loan unless you are 100 percent certain you will be able to repay it on time.

1. Debt Consolidation

The majority of borrowers use a home equity loan for debt consolidation. In fact, millions of Americans a year now take out a home equity loan to pay off 100% of what they owe on credit cards. Consolidating high-interest debt with a tax deductible, low-interest home equity loan or line of credit is a great way to get ahead of the debt game. Doing so, you can stretch out the amount of time you have to repay you debts, lowering your monthly payments further more. Then you can focus all of your debt payment on the one loan instead of paying off many different credit cards and loans. This way, you can make monthly debt payments more manageable and also improve your credit rating.

Important tactic to remember: The most serious pitfall is that many borrowers don't stop racking up credit card debt after they consolidate their bills with an equity loan, and thus fall deeper into debt. It is important to stop using your credit cards so the debt you consolidated doesn't grow again, and pay off your home equity loan as quickly as possible.

Related Article: Debt Consolidation Loan

2. Home Improvement

Making home improvement not only make your home safer or more comfortable to live in but also increase the fair market value of your house. Especially if you have an eye on selling your house, home improvement can make a good investment.

Important tactic to remember: If you're going to do a one-shot, straightforward project, which will be paid upon completion of the project, the home equity loan is probably the way to go. If you have an open-ended project, a home equity line of credit is the most flexible option. Either way, when your house sells, you have two loans to pay off. Be sure the work is going to be worth what you're putting into it.

Related Article: Home Improvement Loan

3. College Education

You can borrow money through a home equity line of credit to pay for college costs. You will be paying interest to the lender, not to yourself, but the interest you pay is tax-deductible as long as your total home equity indebtedness does not exceed $100,000.

Important tactic to remember: Don’t let borrowing money take the place of obtaining financial aid grants. Also, if this is the only reason for home equity financing, investigate an education loan. The interest may be deductible, and such a loan would avoid fees that may be involved in the home equity loan.

4. Financing Essentials

If you’re shopping around for financing a car or some other essentials, consider getting home equity loan at a lower deductible interest rate. A home equity loan can be also used to pay medical expenses not covered by insurance or other medical plans.

Important Tactic To Remember: It can end up costing you more than with other financing options if the amount borrowed is financed over a great number of years. Find out what the payment would be if you financed the car through the dealer and make that same payment to your home equity loan.