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Home equity is the difference between what your home is worth and how much you still owe on your mortgage. As you pay down your mortgage and your home’s value increases, your equity stake grows. Once you are in this position, you can take advantage of the equity you have built up in your home. Here are five ways to utilize a home equity line of credit, or HELOC:
Home improvements
Home improvements is one of the most common reasons homeowners take out home equity loans or HELOCs. Besides making the home more comfortable, upgrades could make it more valuable…
A HELOC, which allows gradual withdrawals can be ideal for long-term projects in which you pay contractors at set intervals, or ones in which the final cost is indefinite. However, keep in mind that if you can’t repay your loan or HELOC, the lender could foreclose on your home.
Debt consolidation
A HELOC or home equity loan can be used to pay off the plastic, along with other high-interest loans. Borrowers may be able to find a loan with an interest much lower than what they were paying for their credit card debt, allowing them to consolidate debt and reduce monthly expenses.
There are drawbacks, however. You could be turning unsecured credit card debt into secured debt, backed by your house, that leaves you vulnerable to foreclosure if you default. And unless you take steps to change the financial habits that brought on your debt in the first place, you’re simply swapping one form of debt for another.
Emergency expenses
Many financial experts agree you should have an emergency fund to cover three to six months of living expenses… If you find yourself in a costly situation — maybe you’re facing large medical bills or unexpected home repairs — a home equity loan or HELOC can be one way to stay afloat.
However, this is only a viable option if you have a plan for how to repay the debt. While you might feel better knowing you could access your home equity in case of an emergency, it still makes smart financial sense to set up and start contributing to an emergency fund…
Big-ticket items
It’s possible to use your home equity for big-ticket purchases. Traveling in particular can come with a steep price tag, and tapping your home’s equity could help cover the costs without having to increase your credit card debt. But it doesn’t add up in many cases.
Take cars, for example. Home equity loans have much longer repayment terms than auto loans, resulting in lower monthly payments. But that also means paying much more interest over time. Cars are also depreciating assets, meaning your car will be worth much less than you paid for it by the time you finish repaying the equity loan.
The same problem applies to expensive experiences, like weddings and vacations. Going into debt – and risking your home in the process – isn’t typically a good route to cover these kinds of discretionary expenses.
Retirement income
If your retirement savings are falling short, tapping your home’s equity can help supplement your income so you can better manage expenses. These funds can be used to cover bills, emergency expenses or even home improvements to make you more comfortable as you age. A big caveat: This strategy relies on your ability to repay the loan or HELOC. If you’re not yet drawing Social Security, you might be able to repay HELOC funds with the benefit money later on. If you’re fully retired and struggling to make ends meet, however, it’s possible you won’t have the means to repay the debt, even if you have a HELOC you don’t have to pay back right away…
For more ways to use a HELOC, as well as the pros and cons for each, read the full article here.
If you’re a homeowner and you need a significant amount of cash, a HELOC could be a good option. Want to find out more about taking out a HELOC through First Federal Bank? Visit a branch or reach out online, and we’ll help you start taking advantage of your equity today!