HOME EQUITY LOANS: DO’S AND DON’TS
Home equity loans are an attractive borrowing choice because you get the best of both worlds: the freedom to use the funds for anything you want, just like you would with a personal loan or a credit card, but without the high-interest rates and fluctuating payments.
Some of the best uses for home equity loans include:
Consolidate High-Interest Debt. According to the Federal Reserve’s Consumer Credit report, the average credit card APR in the US is 16.97% as per the latest information collected in August 2019, while personal loans have an average APR of 10.07%. Home equity loans can help you consolidate your payments and save money by offering considerably lower rates as low as 3.99%.
Home Renovations. HomeAdvisor’s latest data revealed that the national average spent per home renovation project in the US was $46,134 in 2019. Taking out a home equity loan for home renovations like a kitchen remodel, a new garage door, or to replace old plumbing can boost your home’s value and even increase your equity. Additionally, the IRS allows you to partially deduct the interest paid on a home equity loan as long as the money was used to “build or substantially improve” your home.
Refinance Another Loan. This is one of the least talked about uses of home equity loans, but one of the most beneficial ones. If you’ve taken out a variable interest rate loan, you can use your equity to pay it off and turn it into a predictable, fixed-rate loan.
Investing. Equity can be used to open a new business or grow an existing one, to purchase additional real estate, or invest in the market, to increase your earnings.
Pay for Higher Education Expenses. College can be expensive, in fact, tuition fees and other required fees can cost as much as $44,384 in some states, as per the information available at the National Center for Education Statistics, which doesn’t even include room and board. If scholarships and federal programs aren’t enough to cover your child’s college expenses, tapping into your equity poses a great alternative to private student loans, which on average have a fixed APR of 9.66% as of 2019.
As you can see, home equity loans can be used in a variety of ways that can impact your life positively. That being said, there are also not-so-smart ways of using your equity. Although some companies may advertise home equity loans to pay for big events, such as a wedding, to go on vacation, or to pay for big-ticket items, experts strongly recommend against this.
While it’s true that home equity loans offer lower interest rates than most lending products, you must remember that your house is at stake if you default on your payments, so it’s important to use your equity wisely and avoid getting into debt unnecessarily.