There are not many limits on how you can use your home equity, but there are a few good ways to make the most of your loan or line of credit. The best ways to use your home equity include:
1. Home improvements
Home improvement is one of the most common reasons homeowners take out home equity loans or HELOCs. Besides making a home more comfortable for you, upgrades could raise the home’s value and draw more interest from prospective buyers when you sell it later on.
“Home equity is a great option to finance large projects like a kitchen re;s value over time,” Brunker says. “Many times, these investments will pay for themselves by increasing the home’s value.”
Another reason to consider a home equity loan or HELOC for home improvements is that you can deduct the interest paid on home equity loans of up to $750,000 if you use the loan funds to buy, build or substantially improve the home that secures the loan.
2. College costs
A home equity loan or HELOC may be a good way to fund a college education if your lender allows it. While student loans are still the most common way to pay for an education, the use of home equity “can still be advantageous when mortgage rates are considerably lower than student loan interest rates,” says Matt Hackett, operations manager at mortgage lender Equity Now. “It can also extend the term of the debt, reducing the payment.”
If you want to fund your child’s education with a home equity loan product, be sure to calculate the monthly payments during the amortization period and determine whether you can pay this debt off before retirement. If it doesn’t seem feasible, you may want to have your child take out a student loan, as they will have many more income-making years to repay the debt.
Why use home equity for this: Using home equity to pay for college expenses can be a good, low-interest option if you find better rates than with student loans.
Why you should skip it: Taking out home equity could be riskier. If you default on your loan, you could lose your home.
3. Debt consolidation
A HELOC or home equity loan can be used to consolidate high-interest debt at a lower interest rate. Homeowners sometimes use home equity to pay off other personal debts, such as car loans or credit cards.
“This is another very popular use of home equity, as one is often able to consolidate debt at a much lower installment loans in Virginia rate over a longer-term and reduce their monthly expenses significantly,” Hackett says.
Why use home equity for this: If you have a significant amount of unsecured debt with high interest rates and you’re having trouble making the payments, it may make sense to consolidate that debt at a substantially lower interest rate, saving yourself money each month.
Why you should skip it: You’re turning an unsecured debt, such as a credit card that is not backed by any collateral, into a secured debt, or debt that is now backed by your home. If you default on your loan, you could lose your house. If you fall behind on credit card payments, you don’t lose anything (although your credit score will tank). You also risk running up the credit cards again after using home equity money to pay them off, substantially increasing the amount of debt you have.
4. Emergency expenses
Most financial experts agree that you should have an emergency fund to cover three to six months of living expenses, but that’s simply not the reality for many Americans.
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