In recent years, home equity loans have been among the most popular options for borrowing money.
In most cases, homeowners will save a lot of money by choosing these options. They offer rates that are lower than those offered by credit cards or personal loans. In today’s environment of rising prices, home equity is available to most homeowners. The average home has over $320,000 of equity.
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You can tap your equity for a number of reasons, including:
To consolidate debt
Home equity products have rates that are noticeably lower than those of other borrowing options. They’re also a good option if your goal is to consolidate high-rate debt or you’re thinking about putting money on a card.
Bill Westrom of Truth in Equity says that home equity is one of the best ways to borrow money.
You may want to use a home equity loan to pay off a personal loan or credit card that you have. You can trade your high-interest rate credit card or personal loans for a lower rate HELOC or a home equity line of credit. This will save you money over time and help you pay off the debt quicker.
Westrom says that “interest rates on home equity will always be lower” than those of other credit products. This is because the loan is secured with real estate and therefore lowers the risk for the bank.
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To improve your home
You can use your equity in the home to pay for repairs, renovations or updates.
Harmon Kong, cofounder of Apriem Advisors says that home improvements can increase the value of your house, so it’s not just borrowing cash, but you could also be increasing your equity.
The Internal Revenue Service says that the interest on loans and HELOCs can be deducted from your taxes if the money is used to “buy, construct, or substantially enhance” your home. This can lower your taxable income, and reduce your tax burden next April.
As a financial safety-net
You can use your equity to protect yourself from financial disaster. You can get a line of credit if you are worried about the economy, a possible recession or just need cash for an emergency.
Westrom says that using a HELOC to access your home equity is the best way. It can be used continuously over time.
HELOCs are similar to credit cards, but they have lower rates of interest. You’ll be approved for a credit line, from which you can draw money as you need it over a period of time, usually 10 years. During this time, you will only be charged interest on the amount you borrowed. If you have used up all the funds, you can pay it off and withdraw them again.
You will only be charged interest for what you use, not the entire credit limit. It’s a great option for those who want to have some financial peace-of-mind. If you do not need the money, you can leave it untouchable.
What you should not do with your home equity
Angelo Babbaro of The Babbaro Group, the president, advises against using a HELOC or home equity loan for “lifestyle financing.”
Babbaro advises that tapping your home equity is not the best way to pay for vacations, new cars, or funding a child’s schooling.
Whatever you do with your equity, be sure to understand the risks. If you use home equity, your home will be the collateral. This means that if you do not make payments, you may lose your home.
Kong says, “It is secured against your house.” If you are unable to pay your mortgage or face financial difficulties, you may lose your home.
The Bottom Line
Home equity products are a great option in today’s economy for homeowners who want to leverage the value of their home. These products offer historically lower rates than credit cards or personal loans. They can be used to consolidate debt, make home improvements, or provide financial security. Using home equity to pay for non-essential purchases like vacations and luxury items could put your house at risk.
While home equity is a powerful tool for financial planning, keep in mind that the home itself serves as collateral. Homeowners should use these products to achieve a specific goal and develop a repayment strategy that will allow them to make consistent payments over time. Homeowners can make better decisions by using their home equity and understanding its risks and benefits.
