If you need money to pay for home improvements or some other relatively high-cost item, you may be considering taking out a home equity loan or a home equity line of credit (or HELOC). Home equity loans involve taking out a lump sum of equity from your home with a fixed interest rate, while HELOCs allow you to take out money just as you need it but have a variable interest rate that depends on the market. It makes more sense to take advantage of these loans in some situations than in other situations.
Making Home Improvements
This is one time when it often makes sense to take out home equity loans, as long as the payments will still be affordable and you aren't taking on more debt than you can afford to. This is actually the main use of this type of loan. There are a couple reasons why this often makes sense, including the fact that it can improve the value of the home and that it makes the home more comfortable to live in. It's an especially good idea if the improvements are made to make it easier to sell the home because the home equity loan can be repaid when the home is sold.
Necessary Major Purchases
Another common use for home equity loans is to make major purchases. Using this type of loan for this purpose makes the most sense when these purchases are needs, not wants, but even then experts tend to frown on this type of use. This means it may make sense to use home equity to fund the purchase of a car or appliance, but not for something like taking a vacation. However, check the rates for auto loans and personal loans first, as they may be comparable and won't put your home at risk if you're unable to pay them back.
Investments
Sometimes people use home equity loans to make investments, but this can backfire if the investment isn't sound and leave you more in debt than ever. Using this type of funding as a way to pay for college or start a new business may make sense, as these are ways to potentially increase the amount of money you can make in the future. In the case of starting a new business, make sure that you'll still be able to pay off the loan if the business doesn't work out. Putting the money in the stock market might not be such a good idea, however, as it is a riskier proposition and returns aren't guaranteed. Paying for a child's education this way may also not be the best idea if it makes it so the parents will struggle with an excessive amount of debt and be likely to have to delay retirement.
Paying Off Unsecured Debt
One time when it doesn't pay to use a home equity loan is to get rid of unsecured debt, such as credit card debt. The interest rate may be lower, but if you can't pay, you then put your home at risk, which isn't the case if you keep it as credit card debt.
For home equity loans, contact an institution such as TruPartner Credit Union.
