Over the past few years, the growth and stability of financial markets have opened up more possibilities in the use of home equity loans. The growing popularity of these loans can be attributed to appreciating house prices and low mortgage rates. In a nutshell, home equity loans are defined as a loan where the borrower uses the perceived value of their home as a guarantee. However, because you are borrowing against your house, you have to be really mindful of what you use the loan for.
The biggest advantage of home equity loans is that it is a relatively fast way to acquire cash. They also have lower rates than other lines of credit and afford you some tax exemptions. Be sure to enlist the services of industry professionals such as Altrua Financial to guide you through the entire process. This will keep you from making any crucial errors that could put your home on the line. So, what can you use a home equity loan for? Here are the top 5 most common uses:
1. Home Renovations
When using home equity loans to make improvements or renovations, it is important to ensure that the changes made will drive up the value of your home. You have to be mindful of what you decide to change or buy. After all, not all home improvements have the capacity to return your initial investment.
Carefully planning your renovations will enhance your home’s value, and improve the loan-to-value ratio. This is especially true if you want to sell your home in the near future. Try to focus mainly on improving basic rooms such as your kitchen or bathroom.
2. Debt Consolidation
In comparison to other forms of credit, loans that use home equity as collateral have lower interest rates. This makes it possible for you to complete repayments within a shorter period of time, and without the dreaded incremental monthly payments. However, it is essential to ensure that you do not spend this money in the wrong way, leaving you in a worse position than you were in initially. If you cannot pay your home equity loan within five years, it may be a good idea to consider other alternatives.
3. Cover Education Costs
Using home equity, you can cater to advanced education and college expenses. As you gain more education, you increase the possibility of putting yourself in a higher income group. This will increase the probability of faster loan repayment. But before using your home equity to pay for the education of someone in your household, consider other student loan alternatives. This is because if you default a student loan, it will affect your credit score. On the other hand, you might lose your house for defaulting on a home equity loan.
4. Investment Opportunities
You can use home equity loans to invest in your already operational business, or in the stock and real estate markets. Proper financial management is required here to ensure that you do not lose all your investment. So you have to avoid underestimating costs involved, or overvaluing the investment and expected returns.
Diversify your portfolio so that you can make even more extra money once you have finished paying off your home equity loan.
5. Financial Emergencies
This only applies if you have depleted all your non-retirement funds, and are in an emergency situation. You should not bank on this as your only bailout. Ensure you have an emergency fund set up for such situations. In this case, you can use your home equity loan to supplement and sustain you as you look for ways to replenish your emergency stash.