If you’re like most Americans, a lot of your wealth is tied up in your home. But what if you want to access some of that wealth and reinvest it back into your life? A home equity loan may be exactly what you need.
You build home equity over time as you pay off your mortgage; think of it as being the part of your home that you actually own. A home equity loan lets you borrow money from what you’ve already paid off, which you can then use however you want and pay off over a set period of time.
Home equity loans can come in two forms. They include:
• Fixed-rate lump sums. You’ll get all the money in a single amount and your interest rate won’t change. You’ll pay this off like any traditional loan.
• Home equity lines of credit (HELOC). A HELOC opens up a new line of credit that you can access as you need during an initial draw period. This is useful if you’re not sure how much renovations will cost and you don’t want to borrow too little or too much at once.
Wondering what can a home equity loan be used for? Let’s discuss a few ways you can use a loan – and a few special considerations to keep in mind.
What to Know Before Applying
Before you get excited about having a sudden influx of cash from a home equity loan, you need to be aware that it isn’t a magic source of free money.
Remember, you may be using your hard-earned home equity to take out a loan – but it’s still a loan. That means you’ll have to make a plan to pay it back. If you’re unable to make payments, you may even lose your home to foreclosure. It’s important to have a plan for repayment in place before signing the dotted line.
In general, home equity loans are great for big one-time costs or investments. They shouldn’t be used to go on a personal shopping spree or for daily expenses like groceries.
1. Remodeling & Renovations
Most people use home equity loans to improve their homes in some way. Contractors, builders, materials, appliances, and decorations all add up in cost fast, so homeowners can choose to tap into their home equity to help them realize their dream house.
Making improvements, updating appliances, and adding in new features can increase the value of your home if you’re trying to sell. You can use a home equity loan to do anything from purchasing new curtains to knocking out walls to change the layout of your house.
Just keep an eye on the housing market in your area – replacing the HVAC unit and getting a new roof may not be enough to offset falling housing demand.
Taking out a loan to improve your home before selling it is a type of investment. But you’re not limited to just investing in your house with a home equity loan – you could also invest in secondary real estate properties, the stock market, or other opportunities.
Of course, investments are always risky – and with a home equity loan or HELOC, you’re putting your home at risk of foreclosure if you can’t pay it off. Be cautious when funding your investments this way.
3. Debt Consolidation
We’ve talked about debt consolidation before, but did you know that you don’t need to go through a bank or credit union to consolidate?
A common DIY consolidation tactic is to use a home equity loan to take care of car loans, credit card payments, and other miscellaneous forms of debt. This works well because it simplifies the payment process – you’ll only have to worry about paying off one loan rather than many.
Furthermore, using a HELOC in particular for debt consolidation has its own risks.
HELOCs are split into two phases: the draw period and the repayment period. During the draw period, you’ll only have to pay off the interest you accrue. Once the payment period comes, you’re on the hook for interest and the principal amount.
If you can’t afford what’s to come during the repayment period, you’ll be in deep financial trouble. Make sure you have a long-lasting financial plan if you use a home equity loan to consolidate.
Student loan debt can follow you or your child for years – or even decades. A home equity loan can help take off some of the burden of education costs, especially if it has a lower interest rate than a student loan.
There are a few other benefits, too. The interest on home equity loans and HELOCs are taxable while student loan interest isn’t. Also, home equity options don’t have borrowing limits as strict as federal student loans; sometimes the cost of tuition outstrips what you can get from a loan.
Of course, home equity options don’t have the same opportunities for flexibility and forgiveness as student loans. The government may erase or reduce student debt under the right circumstances, so find out if there are any federal forgiveness options for whatever major or career path you’re following.
5. Emergency Costs & Medical Bills
If you have urgent expenses that exceed the amount in your emergency fund, you could use a home equity loan to cover you.
Even in emergency situations, it’s important to look towards the future. Don’t use your home equity if taking out a loan would push you deeper into a financial pit. Make sure to explore your other options before turning to home equity – including working out a payment plan or asking for a deadline extension on a bill.
At Associates Home Loan, our team of experts can help you figure out which loan product is right for you. Whether you’re looking to remodel your home or pay for graduate school, we’re here to help find a financing solution that fits your needs.
Still have questions? Ready to apply? Just contact us to learn more about what a home equity loan can be used for and our unique loan solutions.