As a homeowner, one of the greatest financial tools at your disposal is your home equity. You can leverage your home equity for a loan that can be used to pay for anything from a major home renovation to your credit card bills. However, home equity loans are not without risk. If you default on loan repayments, you risk foreclosure of your home.
Despite this risk, home equity loans have remained a popular choice among borrowers. The key advantage of a home equity loan is that you are likely to be charged a low interest rate, compared to personal loans and credit cards, since you are putting up your home as collateral. Also, home equity loans have a fixed interest rate and monthly repayment schedule, making it easy for you to repay the loan.
Here Are Some Smart Ways To Use A Home Equity Loan:
To clear credit card balances: If you are attracting a high interest rate on your credit card balances, you can consider taking a home equity loan to pay off the outstanding debt. Given that a home equity loan has an interest rate of around 4% to 5%, while the interest rate on credit card balances can go as high as 20%, if not more, it makes sense to clear off high-interest debts with your home equity loan.
Funding A Home Renovation
Homeowners frequently tap into the value of their homes to fund renovation expenses. Given that the average expense for a kitchen remodeling can come up to $20,000, you may want to take a home equity loan, and not a personal loan or credit card advance, to pay for your home renovation.
Starting A Business
If you are looking at setting up a new business or opening a franchise, a home equity loan could give you access to a large sum of money at a very low rate of interest with affordable repayments. This is a better alternative than tapping into your emergency savings or taking a comparatively more expensive personal loan or small business loan.
Your Child’s College Tuition
Given how expensive college tuition is, you can take a home equity loan to pay for your child’s tuition expenses. This may be a better option than taking out a student loan if you can get a low interest on your home equity loan.
That said, remember that it’s best to not put your financial well being at risk to take out a loan to fund your child’s tuition expenses. Instead, your child could consider studying at more affordable educational institutes or take their own student loan.
Keep in mind that you may not automatically qualify for a home equity loan because you own a house. You will need to have accumulated enough equity in the house to be able to take a home equity loan. If you decide to take a home equity loan, ensure that you put the funds to good use and make the repayments on time.