Our homes are more than special structures for raising children and sheltering families. Apart from providing shelter and security to its occupant, it can also serve several other purposes. Homes can be an asset that can be passed on to heirs and dependents. It can also function as an investment that can be sold in the future, or it can act as collateral for a myriad of loans.
The home equity loan, in particular, uses equity—the value of your home minus the mortgage to give you the much-needed funds for certain expenses. It gives you easy access to cash fairly quickly. Plus, it offers fixed monthly payments and lower interests compared to other types of loans.
Uses of Home Equity Loans
Home equity loans can be used for diverse purposes that range from personal, recreational, and business pursuits such as the following:
- House Renovation Projects
Home renovation projects such as a kitchen makeover or adding additional rooms and fixtures require a considerable amount of money. Home equity loans can fund home improvements while increasing the value of your home. Taking out a loan can be a pretty smart move especially if you are considering selling your house in the future as the renovations can add both appeal and further value to your property. Making renovations and add-ons may even entitle you to deductible mortgage interest.
- Funding a student loan for yourself or your child
Sending yourself or your child off to college can be heavy on the pocket as it involves paying tuition, books, housing, and a lot more. Home equity loans can shoulder these expenses and give you the assurance of quality education for your child or yourself.
- Paying off or consolidating debt
Debts are inevitable and having one too many can become burdensome as time goes by. Debt consolidation is a favorable solution to these financial woes by compounding multiple payments into a single monthly installment. Home equity loans used for this purpose allows you to take care of your obligations while saving on interests. What’s more, the money you retain from paying a single aggregate interest can be used to pay for the mortgage on your home.
- Financing life events and major purchases
Vacations or weddings often involve large amounts. Home equity loans can be processed and approved in a few days to finance your travel plans and even make your dream wedding come true. Home equity loans also provide cash for major purchases such as a new car or some needed home appliance replacement.
- Starting a business or a new investment
Using home equity to fund a business or obtain a new investment can be a risky move. This often requires careful thought and the assistance of a financial advisor since you might stand to lose more than your home if your business or investment fails.
- Paying medical bills
Medical expenses and emergencies require immediate funding, especially when it is a matter of life and death. Empower Federal Credit Union awards home equity loans in a lump sum to address the urgency of the situation.
- Setting up an emergency fund
Financial experts advise having an emergency fund equivalent to six months’ earnings to cover for unexpected expenses such as losing a job, car repairs, or home appliance replacement. Home equity loans provide the best opportunity to start your emergency fund and give you access to available cash in case of an emergency.
To loan or not to loan
A home equity loan can be an attractive means to get quick cash for a variety of needs. It is processed fairly quickly and gives a fixed monthly payment scheme that gives you the confidence to pay your loan quickly.
However, taking out a home equity loan needs considerable thought as taking equity makes your cherished home vulnerable to seizure in case you default on your payments. You need to weigh your options and make sure that your concerns justify the need for a loan.
If you choose to avail of a home equity loan, you need to ensure that you use the allotted amount for worthwhile purposes. As seen in the list above, some reasons for taking on a home equity loan are prudent while some may need further evaluation given the risk of putting your house up for collateral.
At the end of the day, weighing on the pros and cons of taking on a home equity loan can lead to a sound decision to guarantee your home will not only provide the needed leverage as it also needs to safeguard the roof above your head.