You have equity in your home and you want to tap into it. You take out a home equity loan, now what? Does the lender have a say in how you use the funds?
In reality, no, the lender can’t tell you what to do with your home equity funds. The equity is yours to do with you as you see fit. Does that mean that anything is fair game? While it may seem easy to get the cash out of your home and use it as you want, it doesn’t always make sense to do so.
So what should you do with your home equity funds? Read the top suggestions below.
Home renovations are one of the top reasons to tap into home equity. You take the money out of the home only to reinvest it into the home. Not every home renovation will give you a solid return on your investment, but some will. If you want an immediate return on your investment, talk to a local appraiser or real estate agent. Find out what renovations reflect in the home’s value. In most areas, upgraded kitchens, bathrooms, and room additions have the largest effect.
That doesn’t mean you should only renovate parts of the home that will increase the value, though. You get to decide what to do with the funds. If you’ll stay in the home for the long-term, fixing up the home will naturally increase its value because it will be in better condition. But, if you’ll move soon, you may want to really think about what you invest in the home. If you won’t see a return in the value, it may not be worth it.
Pay for College
College is expensive and student loans often have high interest rates. If you have enough equity in your home, you may consider taking the cash out and paying for college without the student loans. With a lower interest rate and only a few closing fees, you may save thousands of dollars this way.
Just remember, there’s a difference between a home equity loan and a student loan. Yes, you get lower interest rates, but you also use your home as collateral. If you default on the loan, the lender could foreclose on your property. If you default on student loans, the lender may have legal recourse against you, but they can’t take away your home.
Pay for Medical Bills
Medical bills can get expensive, especially if you stay in the hospital or have rehab. If you have high deductibles or co-pays, it can seem impossible to pay the bills off. Tapping into your home equity can help you pay the bills. While it may not be something you want to spend your equity on, sometimes it’s imperative.
Cover Emergency Costs
We’ve all experienced emergencies before. When you aren’t prepared financially, though, it can really throw you for a loop. Knowing that you have equity in your home can help alleviate the stress. Whether your furnace blew out, your car died and can’t be repaired, or you lost your job, your home equity could be your emergency fund to get you through the ‘hard times’ until you pick yourself back up.
Use this suggestion with caution. If you are not the type of person that can put your credit cards away and not use them, don’t use this option. If, however, you can trust yourself to hide the credit cards and not use them, your home equity could help you get out of debt.
Credit card interest rates are typically pretty high. You may find some as high as 20%. Home equity loan rates are much lower, typically less than 5%. You can save a significant amount of money on interest and pay your balances down faster by using your home equity. If you rack up the credit card debt again, though, you end up worse off than where you started, so make sure you are able to avoid using them again.
Buy Other Properties
Some homeowners tap into their current home’s equity to buy another home. You can use the funds for the down payment or to pay for the home outright, depending on how much equity you have. Home equity loans often have much lower interest rates than purchase loans, making it much less expensive to buy another home. Before you do this, though, make sure you can comfortably cover the home equity loan payment. If you will use the funds for an investment home, make sure the rent you’ll collect will cover the home equity loan plus any loans you use to buy the investment home itself.
You can use your home equity loan funds, as you want, just exercise caution. Don’t just go crazy with the money because you know it’s there. Remember, the funds are tied to your home. You can lose your home if you don’t make the payments as required. Only use the funds for large purchases that are necessary or make sense, like a college education or home renovations.