The majority of borrowers use a home equity
loan for debt consolidation, like creating one
payment to take care of all that credit card debt.
The loans are also used for a wide variety of
other purposes, such as home improvements, medical
expenses, education, emergencies and big-ticket
purchases.
Here are some ways to use equity loans:
1. Debt consolidation: Many people have racked
up so much credit card debt they have turned to
home equity to ease the burden. Doing this can
significantly reduce your monthly interest charges,
allowing you to save or invest that much more.
If you're paying a 17 percent annual percentage
rate on a $10,000 Visa balance, for example, you
can save a bundle over time by paying it off with
a tax-deductible home equity loan at around 8,
9 or even 10 percent. Making monthly debt payments
more manageable this way can come with a bonus
-- it can improve your credit rating. (Use this
calculator to figure out the real cost of your
debt.)
TIP/PITFALL -- Before you secure a loan, consider
how you are going to prevent yourself from building
up that credit card debt again. Cut up all but
one or two cards, quit carrying them with you
and start using cash more often.
2. Home improvements: Making upgrades and repairs
to a house has aesthetic benefits by making your
home safer or more comfortable to live in. It
can also increase the fair market value of your
house. That's why many homeowners make home-equity
financed improvements with an eye toward selling
their property.
TIP/PITFALL -- Be sure the work is going to be
worth what you're putting into it. Kitchen and
bathroom improvements raise value the most. But
if you spend $10,000 to put in a patio, a prospective
borrower may not consider it worth the higher
price tag you put on your home.
If you're making a small improvement before selling,
make sure another option such as a credit card
or a personal loan wouldn't be a better way to
pay for it.
Also, be aware that some lenders will not give
you an equity loan if they know your home is on
the market, and if they do, they might charge
a fee. And remember that if you've used a home
equity loan, when your house sells you have two
loans to pay off.
3. Education: A loan used for college or technical
school can pay for itself several times over if
it lands the borrower a better job. More families
are also turning to home equity to pay for their
children's education because the cost has skyrocketed,
they haven't saved enough for it and their incomes
are too high to qualify for grants or government-backed
loans.
TIP/PITFALL -- College often comes at a time
when parents are close to retirement and using
their equity could deplete income for later years.
Those who qualify for government-backed loans
might want to choose that option instead. Or,
if the student can make do with a smaller infusion
of cash, parents might consider a small, discounted
personal loan in their name and their child's.
These loans can be structured so borrowers pay
only the interest while their children are in
school.
4. Medical expenses, emergencies, big-ticket
purchases: An equity loan can be a godsend if
you are hit with thousands of dollars in medical
bills or you lose your job. Tax advantages and
lower interest rates also make equity loans a
smart way to finance a new car, motorcycle or
some other high-price purchase.
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