If you have equity in your home, you can use it for cash in order to improve your overall financial situation. This is especially helpful since home values have considerably increased in the past couple of years in so many areas.
What is Home Equity?
Home equity is a fraction of the ownership that has been built up in your house. You’ll be able to pay the loan balance on your house more and more with each passing month. For instance, if you buy a house using a home loan and put 10% down, then you can get 10% equity in your house when starting out. And then as the years pass you by, you’ll be paying more for principle rather than interest and build even more equity in your house.
Now while it’s a good thing for you to have access to immediate cash when you’re short of it, you must be very cautious when you do this and ensure that you have a good reason behind it as well. Besides, this behavior could end up in you losing your entire house if you’re not careful.
That’s why it’s important for you to figure out what you want to use your money for, which is for something important instead of simply buying snacks, a new movie or a pair of new clothes. So, you need to ask yourself “what can a home equity loan be used for?” Here are some of the most common choices available:
Smart Reasons for Tapping into A Home Equity
Home Renovations and Improvements
Home renovations are one of the most common reasons for what HELOCs or home equity loans should be used for. Other than making your home more comfortable for your enjoyment, renovations can also raise a house’s value and attract more interest from potential buyers when you’re looking to sell it later.
But if you are indeed going to sell your home, later on, you should know about the type of improvements you want to make. This includes adding features that don’t necessarily increase the home’s value. Whether it’s repairs, improvements, or upgrades, your house’s value will appreciate very well.
For minor expenses such as bathroom fixtures, a new front door, adding a patio or deck, or even upgrading kitchen cabinets, you should consider a HELOC.
Home equity loans or HELOCs can also be used to consolidate debts of high interest to those of lower interest. Homeowners can make use of this to pay some of their personal debts like credit cards or a car loan.
Now while this does sound like a great option, there is also a risk of defaulting on loans or coming across late payments if you don’t budget your spending carefully. Eventually, it may come to the point where you could encounter credit issues or worse, lose your house. But if you really want to consolidate debts because of financial pressure, then you have to get a professional to draw up a plan for you so you can better manage your finances.
Loan aggregators like Loans Geeks can help you consolidate your debt in Canada.
Another one of the best home equity loan uses is to fund your child’s college education. This is because a HELOC or home equity loan’s interest rate is lower than a student loan’s interest rate. Since October 2019, the home equity loan interest on average was 5.85% compared to an undergraduate student loan’s fixed interest rate of 4.53% and a graduate school loan’s rate of 6.08%.
If you’re looking to fund your child’s education for their future using your house’s equity, then be sure to have the monthly payments calculated as well as your ability to pay the debt off before it’s time for you to retire. However, if you’re on a limited income, then this option is not for you. Instead, it would be best if your child takes out a student loan as they’ll have more years to pay it off themselves later.
One of the most common answers to “what can home equity loans be used for” is a life emergency. Going for divorce, a job loss, unexpected health costs, or caring for someone very close to you are one of the most important emergencies in life.
Emergency funds can usually cover between 3 to 6 months’ worth of living expenses in times of a crisis. However, that fund might not be enough to help homeowners stay afloat if they find themselves in a situation suddenly – like when they’re out of work or perhaps have incurred heavy medical bills. This is when a home equity loan is a smarter tactic than an emergency fund.
Sometimes, homeowners utilize their home equity to invest in real estate or the stock market, hoping that the returns will exceed the cost of home equity loans.
This has its own set of risks, however, as there aren’t any guarantees that the stock market is going to perform as expected. Likewise, if home equity loans are used to invest in real estate, there’s no way homeowners can know for sure that the investment property isn’t going to lose its value or even give them the desired income they’re looking for, so they can get a return on their investment.
However, if homeowners have their eyes on an affordable vacation house for their family and require a down payment, then that is where a home equity loan may be more suitable to their liking. However, when it comes to investing in something that comes with a lot of risks just to make more money out of it, then you’re better off looking elsewhere.