5 Ways to Use Your Home Equity Loan This Year

What Is a Home Equity Loan?

A home equity loan allows you to borrow a lump sum from home equity, usually up to 80 or even 85 percent of your home’s value minus the balance on your mortgage. Because a home equity loan uses your home as collateral, a lender can offer you a lower interest rate than sources like credit cards or personal loans. Plus, there are several different types of home equity loans to choose from:

• Fixed-rate loans have the same interest rate throughout the life of the loan. A fixed interest rate makes budgeting predictable and easy from the start.
• Adjustable-rate mortgages, or ARMs, have an introductory fixed interest rate, which is typically lower than fixed-rate mortgage rates. After the introductory period, the interest rate adjusts based on the market. While less predictable, ARMs can be useful for people who plan to pay more on their loan during the introductory period or for those planning to sell their homes soon.

What can a home equity loan be used for? Typically, you should use this loan to improve and invest in your home and life. Before taking on a home equity loan, ask yourself if the benefits outweigh the costs. These loans work best for people who know the total amount they need to borrow and have a solid plan for repayment.

Here are five ways to use a home equity loan this year.

1. Home Remodeling and Renovation

Have you been dreaming of a modern kitchen or a luxurious remodeled bathroom? Is a room in your home in need of repair?

One of the best and most common ways to use a home equity loan is to remodel, repair, or renovate your house. Since you’re using your house’s value as collateral, a home equity loan can be the ideal funding source for these types of projects.

Home improvements enhance your living space, making it a more enjoyable, comfortable place to live. A remodel can also add value to your home. A newly remodeled kitchen can be a particularly valuable investment, for instance. Depending on the scale and quality of the renovations, this can net a rate of return of 31 to 85 percent.

2. Debt Consolidation

High-interest debts can significantly impact your financial well-being, and juggling multiple sources of debt can lead to even more stress. Home equity loans are an option to help you consolidate debt and pay a lower interest rate.

Home equity loans generally have lower interest rates than credit cards and other unsecured loans. You can save money on interest over time by taking out a loan to pay off your higher-interest debts. Consolidating your debt into fewer loans also means you can simplify your payments.

Carefully consider your options before taking out a home equity loan to pay off other debts, as defaulting on this loan can put your home at risk. Use this as an opportunity to pay off debt, not to accumulate new ones.

3. Make a Business Investment

Ready for your next business venture? Whether you have your eye on real estate investments or you’re looking to start or expand a business, a home equity loan can give you the funds you need to get started.

Investing in real estate or a business can be a good use of a home equity loan since you’ll be able to repay your loan with your profits. You may also find home equity loans have lower rates than business loans.

However, always remember that there is no guarantee on any business or investment venture. Using a significant home equity loan to fund a business could result in losing money or even your home if you default on your loan. Consider speaking with financial experts to determine whether your investment strategy aligns with your financial goals and risk tolerance.

4. Pay for Education

Higher education for your children or for yourself is a powerful way to pursue your dreams and secure a better future. But there’s no doubt that college is an expensive investment that can cost tens or even hundreds of thousands of dollars. A home equity loan can help pay for tuition, textbooks, and other costs.

Private student loans are the most common way to fill the gap not covered by federal student loans. However, they’re not the only option. If you’re sitting on a lot of home equity, it may be worth it to compare the interest rates. Home equity loans can have lower interest rates.

Before committing to using home equity for education, explore all your other options first. Use the maximum federal financial aid available by submitting your yearly FAFSA. Federal student loans have benefits such as income-based repayment plans and opportunities for loan forgiveness. Subsidized loans don’t need to be paid until graduation.

While education is important, it’s crucial not to overextend your own financial situation. Use this loan to support yourself or your children while also considering your other long-term goals, such as retirement.

5. Fund an Emergency

No one likes to think about emergencies, but sometimes, life is unpredictable. If you get hit with unexpected home repairs, medical bills, or other significant expenses, a home equity loan may be a good option over other funding sources.

As with any loan, it’s essential to borrow responsibly and only take out what you need. Speak to a financial expert to determine if a home equity loan is the right choice for your situation.

At Capital Credit Union, we want to help support your goals and dreams. Whether you’re considering using a home equity loan for remodeling your home or discussing options to help you achieve your financial goals, we’re here to support your financial journey.