When is a home equity loan or line of credit a smart choice?

You’ve decided to use the equity in your home to fund a major purchase or project, but now you’re nervous. Is it wise to do? Is there a better choice?

The answer is: maybe.

There are good reasons to tap your home’s equity, and there are some not-so-good reasons. Because these types of loans are secured by your home, you should carefully weigh the risk against the benefits.

Here are several scenarios where a home equity loan or line of credit might be considered.

You need to repair your home. YES

The equity in your home can be an excellent source of funds when you are facing a major home repair or want to add upgrades that will increase the resale value of your home. Repairing a faulty HVAC system, replacing a leaky roof, repairing a cracked foundation – these big-ticket items are not normally covered by your homeowner’s insurance, and delays in making repairs can lead to even more expensive problems.

You need to upgrade or remodel your home. YES

Leveraging the equity to pay for the project is a sound financial decision, especially if the upgrade or remodel will increase the value of your home. One particularly effective strategy is to take out a HELOC to upgrade your home just before selling it, and use the proceeds of the sale to repay the credit.

You need to pay college tuition. YES

When you need funds in a hurry, a home equity loan or line of credit may be easier and faster to obtain than a student loan under some circumstances. For instance, if you already have an equity line of credit, you can simply write a check or take an advance from the home equity line to pay necessary college costs. Home equity loans may be less costly than other loans, plus the interest paid on a home equity loan may be tax deductible.

A home equity line of credit usually carries a low interest rate, is easily accessible and can provide immediate liquidity. Also, interest rates on home equity loan types are usually lower than on student loans making the home equity line of credit a more cost effective option for college tuition and costs.

You’re carrying high credit card debt. YES

Consolidating consumer debt under a home equity option can be a valuable consideration. Home equity loans may be tax deductible and offer lower interest rates. Plus, with the interest-only payment options available on the home equity line of credit, you may also reduce your expenses with lower monthly payments.

You need to fund your business. MAYBE

Some business owners look to the equity in their home as a way to fund a new business or provide an infusion of capital into an existing business. A home equity line of credit, in particular, can help a business navigate monthly cash-flow. The interest-only payment structure is attractive during the slower seasons with the option to repay principal during the boom seasons.

You need a new car. MAYBE

Rates on auto loans are low right now for many people, but that’s not always the case. Before you buy a car using a home equity loan type, look to your credit union for an auto loan and compare the rates between the two types of loans. When comparing rates, remember that a home equity loan or line of credit may be tax deductible. Consult your tax preparer for details.

You just can’t seem to make ends meet each month. NO

Using a home equity loan – or any loan – to pay normal, day-to-day expenses is a sign that you need help with your budget. There are many resources for people who want help managing their monthly cash flow, including books, web sites, free or paid classes and seminars, and professional financial advisors. There are several Financial education resources available on this website. 

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