What is a home-equity loan all about?
From a financial standpoint, owning a home is a powerful investment because you can have equity. So we’re all on the same page, home equity can be built over time and then used as a kind of down-payment if you’re thinking about taking out another loan.
This is known as a home-equity loan and basically uses your home as collateral for the money you’re taking out. As with any loan, there are both good and bad ways to use a home-equity loan. The worst-case scenario resulting in your house being foreclosed because you’re unable to keep up with payments; therefore, you’re going to want to invest wisely.
Of course, that’s a worst-case scenario, and if you’re smart with your investment, then this shouldn’t be a problem. With all this in mind, today we’re going to explore four powerful ways you can use your home equity loan.
#1 – Clearing High-Interest Loans & Credit Cards
Having a high-interest loan to your name is a complete waste of money because you’re paying so much back for no reason. It’s dead money, and the chances are it’s just going to keep you in debt for longer. More often than not, home equity loans have much lower interest rates.
Some credit cards can reach soaring highs of sometimes around 20%; whereas home equity loans seem to sit around the 4-5% mark, which means paying off your credit card loan with a home equity loan will be saving you around 15% interest through the duration of your loan time.
If you’ve got $10,000 on your credit card, this means you’ll be saving $1,500; which is a huge amount of money. However, as we mentioned above, you need to make sure you’re able to make the payments on your loan. Otherwise, your house can be at risk of being repossessed or taken away.
“Of course, if you don’t have a super high-interestrate, and home equity rates are similar interest rates, or even slightly lower, it’s probably not worth putting your house on the line to pay it off. Instead, just try paying a bit extra off your credit card every month to clear it quickly” explains Mary Harper, a business consultant at Academized.
#2 – Larger Home Improvements
Many homeowners use a home equity loan by putting the money back into the house for home improvements. This could be anything from home remodeling to redesigning the kitchen or other rooms in your home. Adding an extension, or replacing the roof, adding solar panels, or renovating floors, walls and ceilings are few other ideas of what to do.
This is a worthwhile idea because the money stays with the value of the property. Of course, if you plan of selling the house, don’t bet on getting all your money back and you won’t get a dollar-for-dollar return.
For example, replacing the roof or adding solar panels for $60,000 won’t add anywhere near $60,000 to the value of your property. However, if you plan on using the improvements for your own enjoyment and for your own living benefit, this can be money well spent.
#3 – Invest in Something
If you’ve ever been interested in investing in the stock market, a home equity loan could be the injection of cash you need to get you started. This can be extremely profitable; say, for example, you take out a home equity loan at 3%, and have a return on your investments of anything above that, you’ll be making money.
Of course, this doesn’t mean that investing doesn’t come without its risks, and you’re never guaranteed a return on your investment, and you may even end up losing money.
Nevertheless, if you know what you’re doing, or you know someone who does, and you’re able to afford the loss if it does happen, you can use your home equity loan to make you incredibly financially wealthy.
#4 – Paying for Your Child’s Education
The final most common and most beneficial way people in the US use their home equity loan is to pay for their children’s education and tuition fees. This could be a private or college education, but you’ll need to do some research beforehand.
Start by looking to see what kind of private or bank loans are on offer to you, or what student loans are available. Then look into your home equity loan and compare the interest rates on each. You can then choose whichever option looks best for your individual circumstances.
Look into the all the options that are available; such as your child attending a more affordable university or helping to pay for their own college fees but taking out their own student loan. If they were to take out their own loan, you could split the bill, so it’s more affordable for everyone involved.
As with all these methods, it’s important to make sure you’re not putting yourself out of pocket. Think about your future and other investments you may want to make throughout your lifetime. A common one is saving some of your home equity loan for retirement, or for a lifetime trip that you’ve always wanted to go on.
Be organized, plan ahead, and use your home equity loan in the best possible way for a maximum return.
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Nora Mork is a business and marketing professional, working at Essay Roo essay writing service. She helps businesses make effective marketing and communication decisions, and write expert columns at online magazines and blogs.