Considering a home equity loan? Here are some of its best uses
There are times when you may need extra cash to cover a large expense (or expenses) you can't pay for out of pocket. While many people turn to credit cards or personal loans to get these funds, homeowners have another source at their disposal: their home equity.
With a home equity loan or home equity line of credit (HELOC), you can draw from the value you've built in your home to pay for any number of things. These products are often more cost-effective than other financing options and, in some cases, may even save you a little money on your taxes. However, as with any other financial product, it's important to know how to best use a home equity loan or HELOC so you can borrow wisely.
Start exploring your home equity options online now to learn more.
Best uses for a home equity loan, HELOC
While you can use your home equity for any purpose, these are the ones that often make the best use of your funds.
Best use for either product
Whether you take out a home equity loan or a HELOC, arguably the best way to use your funds is to make home repairs and improvements that boost your home's value. If these improvements are considered eligible by the IRS, you can deduct the interest you paid when you file your tax return.
Specifically, the IRS says, "Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer's home that secures the loan. The loan must be secured by the taxpayer's main home or second home (qualified residence), and meet other requirements."
If you have a solid idea of how much you'll need for home repairs or renovations, a home equity loan may be best for you as it provides a one-time, lump-sum amount. A HELOC is better when you're not sure how much you'll need and want the ability to withdraw funds as needed.
Find out how much you could borrow with a home equity loan here.
Best uses for a home equity loan
In addition to home repairs and improvements, a home equity loan is ideal for debt consolidation. These loans typically have interest rates considerably lower than credit cards and personal loans, so they're a great way to pay off your high-interest debt and save money over the long run.
A home equity loan is also well suited to other one-time expenses for which you need a specified amount, such as:
- Paying a large medical bill
- Major expenses (such as a new car or down payment on a second property)
Best uses for a HELOC
Because you can withdraw funds from a HELOC as needed, it can be a good way to finance sudden, large expenses if you don't have a sufficient emergency fund in place. Unlike a home equity loan, where you must repay the full loan amount, you only need to repay the amount you borrow from a HELOC. This flexibility to take out only what you need when you need it can save you significant interest.
A HELOC is also good for other ongoing expenses when you aren't sure exactly how much you may need. These include:
- Paying for a child's college education
- Providing retirement income
- Funding startup business expenses
Compare today's top HELOC offerings here.
The bottom line
Home equity loans and HELOCs can be valuable financial tools if used correctly. By using your home equity to fund things like home renovations, debt consolidation and emergency expenses, you can meet your financial goals in a way that's often more affordable than credit cards and personal loans.
That said, it's important to remember your home serves as collateral for both of these products, which means you could lose it in foreclosure if you're unable to keep up with payments. So, be sure to borrow only what you need and have a solid repayment plan in place before signing on the dotted line.
