What can you use a home equity loan for?
There are many ways to finance unexpected emergencies and other large expenses. The ones people often turn to include credit cards and personal loans. But these aren't always the best choices. Their interest rates can be high, so you wind up paying much more for the money you borrow than you might with other options.
For homeowners, a cost-effective source of financing lies in the equity they've built in their homes. Two common ways to tap into this equity are home equity lines of credit (HELOCs) and home equity loans.
You can use a home equity loan for any expenses, but some are a better use of the money than others. In this article, we explore the best ways to put home equity loan funds to work for you.
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What can you use a home equity loan for?
How you use your home equity loan funds is up to you. Common ways people use them include:
- Home repairs and renovations
- Emergency expenses
- Paying down high-interest debt
- Large expenses (such as a new car)
Because you receive your funds as a lump sum and begin repaying the loan immediately, it's important to only borrow as much as you need. Remember that every dollar you borrow must be paid back with interest.
You can shop for home equity loans online right now.
Best uses for a home equity loan
There are no restrictions on what you can use a home equity loan for. That said, some uses give you more bang for your buck.
Home repairs and renovations
The best use of home equity loan funds is to make improvements to your home. That's because these improvements may qualify for a tax deduction.
"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 IRS explains. "The loan must be secured by the taxpayer's main home or second home (qualified residence), and meet other requirements."
Examples of home improvements you might make include:
- Building an addition
- Renovating a bathroom or kitchen
- Installing landscaping
- Repairing your roof
- Upgrading a plumbing, electrical or HVAC system
To determine if your home improvement plans qualify for a deduction, contact a tax professional in person or via a tax filing site.
Consolidating high-interest debt
Home equity loan interest rates are often significantly lower than other financing options. Average credit card interest rates are currently around 20% and average personal loan rates are about 8% to 36%.
Home equity loan rates, on the other hand, are around 7.8% to 8%. For this reason, a home equity loan can help you consolidate high-interest debt like credit cards, enabling you to pay your debt down faster and save on interest charges.
Check your home equity loan options online here now.
Investing in your financial future
You can get a great return on your investment by using your home equity loan funds to pay for things that can earn you more money in the future.
For example, paying for a college education can net you a high salary, starting a business can generate revenue and buying an investment property can provide passive income. By funding these expenses with a home equity loan, you can set yourself up for greater financial success for years to come.
The bottom line
To get the best home equity loan, take the time to shop around for lenders that offer the best rates and terms. Don't overlook your current mortgage lender; if you find a great deal elsewhere, they may be willing to meet or exceed it to keep your business. Just make sure to use the same numbers when comparing lenders. By getting offers for the same amount, you can more accurately determine the best rates available.
