A home equity loan enables you to access the equity in what is probably your greatest asset -- your home. If you have been paying on your mortgage for several years, and if real estate in your area has appreciated, the equity in your home may have had a chance to really build. A home equity loan allows you to access that money to finance many things. It is important, however, to use this money wisely.
With a home equity loan, you can borrow a lump sum at a fixed interest rate. Just as with your mortgage, you pay in monthly installments. This loan probably has a slightly higher interest rate than your first mortgage, and may also have closing costs. Some lenders will waive them or allow you to roll them into the loan. A home equity loan is usually considered smart debt if it is used for the right purposes. There are several good ways to use your home equity.
1. Home renovation
If your home is in need of renovation, a home equity loan can help. For a needed update or addition, the renovation can add value to your home, making the home equity loan well worth it. Be sure that any renovations do not make your home too hard to sell in the future, though, by making it too expensive for your neighborhood.
2. College tuition
If you have kids headed to college and are in need of funds fast, a home equity loan is an option to consider. You’ll be able to get a good interest rate since the loan is secured by your home. One drawback is that you have to begin repaying the loan immediately, unlike student loans that your children may be able to get.
3. Debt consolidation
Perhaps you have a bit of debt on several high interest credit cards. Instead of throwing away all of that money on interest, you can use a home equity loan to consolidate your debt, get a much better interest rate, and probably pay off the amount more quickly. Keep in mind that this is not a wise strategy if you continue to charge up your credit cards.
4. A major expense
A home equity loan might be a good way to pay for a major expense. For example, if you need a new car, you may not want to pay the high rates associated with car loans. You can use your second mortgage to buy it. You can also use a home equity loan to help purchase a second home. If you do not have enough home equity to pay for the purchase price, you can at least put down a sizeable down payment to make your payments on your second home much less.
An important point to remember
A home equity loan is not free money. You now have to make monthly payments toward this loan in addition to your first mortgage. Also, if you sell the house, the balance of the second mortgage is due. That means your profit from selling your house will be less. For example, say you owe $150,000 on your mortgage when you sell your home for $250,000. Without a home equity loan, your profit would be $100,000 minus the fees associated with selling the house. If you also have a home equity loan for $50,000, you will only receive $50,000 minus those same costs.