Are you considering taking a home equity loan? If you have a significant amount of equity in your property, it may be a good idea to tap into that equity in the form of a home equity loan. While a home equity loan could give you a much-needed boost in liquidity and available funds, it's also an instrument that should be managed carefully. If you're unable to make your home equity loan payments, it could result in additional fees, a diminished credit score, and even foreclosure proceedings against your home. The best way to manage your loan is to make sure you're taking it for the right reasons. Here are three good reasons to tap into your home's equity:
Home renovations that add value. Home improvement projects are a common reason for using a home equity loan. If you manage the project properly, the renovation could enhance your home's value, thereby increasing your overall equity. The key is to choose a project that is likely to increase value. Upgrading a kitchen or bathroom or finishing the basement could be a big value booster. However, something like installing a pool may or may not add value, depending on your buyer's feelings about pools.
Also, be sure not to invest too much money into your home. Your home likely has a natural value ceiling based on surrounding properties. If you put too much money into a renovation, you may not recoup that money because buyer's simply aren't willing to spend over a certain amount in your area.
Unexpected emergencies. Did you recently lose your job or go through a costly medical procedure? You may not want to use debt to finance the emergency, but it's also possible that you may not have many alternatives. In this scenario, a home equity loan could be a better option than using high-interest credit cards. Also, a home equity loan may be easier to obtain than other debt because the equity loan use's your home for collateral.
Pay off high-interest debt. Generally speaking, home equity loans have lower interest rates than credit cards and other high-interest debt. That's because the home equity is backed up by your house, so many lenders view it as a safer form of debt. If you have a significant amount of high-interest debt, you may be able to pay it off by taking out a home equity loan. Then you can exchange the high-interest payments for lower interest equity loan payments. That could give you more cushion in your budget and strengthen your financial situation.
If you're curious as to whether a home equity loan is a good idea for you, talk to a local bank (such as Union State Bank) or another lender. They can analyze your home and finances and help you make the best decision.