If you have equity in your home, you might consider using it. There are good and bad ways to do so. Using it for the wrong reasons could leave you in trouble. It could even leave you without a home. Using home equity for good reasons, though, could help you get ahead. Here we discuss the smartest ways to use your equity.
Fixing up Your Home
The best way to use home equity is to fix up your home. It just makes sense. You take cash out of your home but invest right back into it. If the changes you make increase the value of your home, it’s a win-win situation. Even if you don’t see an immediate increase, chances are down the road you will get a return on your investment.
In the worse sense, if you can’t afford to make the payments, you could probably sell your home. This way you get the money back. You never lost anything and most importantly, you didn’t lose your home. Even if you had to sell it, you walk away with cash in your hand. If you didn’t default on your payments yet, you didn’t ruin your credit either.
Before you use the equity in your home to fix it up, figure out how the changes will affect your home’s value. You can consult with a real estate professional or appraiser for this step. With a basic idea of the changes you plan to make, they can let you know how it will affect your home’s value. Of course, it won’t be an exact number, but knowing an estimate can help.
A few examples of improvements with a high return include:
- Landscaping – Curb appeal is huge!
- Kitchen remodels – Only minor changes are necessary!
- Exterior additions – Patios, decks, and porches add value!
- Updated windows – Increasing your home’s energy efficiency!
- Expanding a room – More living space!
Debt consolidation can be a great way to use your home equity. It can also be a horrible way to use it. You must have willpower for this method. Confused? Read on.
You take money out of your home to pay off your numerous credit cards. You are tired of paying the 20% and higher interest rates. It makes great sense. You trade in high interest rates for a much lower one. You attack more of the principal of the debt. This means you may pay the debt off faster.
What’s so bad about that? The only way debt consolidation could be a bad use of your equity is if you charge those credit cards up again. You cleared them off and are still paying on them. If you run the credit cards up again, you just doubled your debt. This is where the willpower comes into play. Don’t use your credit cards. Save them for absolute emergencies only. You probably shouldn’t cancel them, though. If you do, it could hurt your credit score.
The best case scenario is paying them off and then locking them up. Consider it a second chance at financial security.
Paying for College Tuition
College is expensive. There’s no doubt about it. There is financial aid out there, but it’s often not enough. If you don’t qualify as “financially needy” you could pay pretty high interest rates. A better use may be to tap into your home’s equity. It depends on your situation, though.
First, we recommend exhausting all federal loan options you have. Many of them are subsidized. This means the government covers your interest for a portion of the loan. Oftentimes it could be as much as half of the life of the loan. That’s a lot of interest! If you exhaust those options, then you can compare home equity loans versus student loans.
This is especially helpful if you only qualify for private student loans. The interest rates on these loans vary. Sometimes they are even adjustable rate loans. Compare the interest, terms, and cost with a HELOC to see which option is best for you.
Remember, a HELOC puts your home at risk, though. If you default on your student loans, you don’t lose your home. If you default on a HELOC, it’s a possibility. Consider carefully the affordability of the payments before you decide.
If you don’t have an emergency fund, using your home equity might be a good option. You must be disciplined enough to use it only for emergencies, though. This means things you can’t afford on your own. A medical, car, or house emergency qualifies.
Just like your credit cards, though, you must forget you have the loan open. It’s a great way to feel secure regarding emergencies. But, it is also a way to use your equity foolishly. Knowing you have the available funds for a low interest rate can be very tempting. Leaving it untouched unless you need it, though, can be a great use of your equity.
Home equity has its benefits and drawbacks. Knowing the full implication of taking the money out of your home should help. Don’t use the funds unless you know you can afford to pay them back. At the very least, make sure your home is sellable. If you end up in a jam, you could sell your home. You minimize the damage to your credit this way.
Using your equity can be smart for the reasons above. These loans often offer low interest rates and attractive terms. Knowing that your home is at stake should keep you motivated to find ways to continue to pay it. Make sure you know the terms of the loan and understand the repayment period, if you take a HELOC. If you know you have little willpower, consider a home equity loan rather than a HELOC. This way you receive the funds all at once. You don’t get access to the funds again once you pay them off. For many people, this is the smarter option.
Only you know what will work for you. Make sure you read the fine print and shop around with different lenders. With the right effort, you could financially benefit from the use of your home’s equity.