7 ways to make your home equity loan work for you.
The best deal is important if you are looking to obtain a loan. It’s important to choose loan options that have low fees and offer competitive interest rates. You also need to ensure you are borrowing for long-term benefits.
You might want to look into a home equity loan also known as a 2nd mortgage. This type of loan lets borrowers borrow against equity in their home. The collateral is your property’s worth.
How does a home equity loan work?
Home equity loans allow you to use your house as collateral. A home equity loan usually offers lower interest rates than credit cards and other unsecured loans. Home equity loans have low fixed interest rates, a set repayment time, and fixed monthly payment.
You need to have substantial equity in order to qualify for home equity loans. You can only borrow up to 80 percent of your home’s worth, plus any outstanding mortgages. If your property is worth $300,000, then the maximum equity you can borrow is $240,000 (340,000 x 0.8) A home equity loan can be used to borrow up to $40,000 for mortgage debts between $40,000 and $200,000 if you owe $200,000
Note that the home equity loan is secured by your home, so if you can’t repay it, the bank may be able take your home.
Credit card bills paid off
The average credit card APR now stands at 16%. This means that a home equity loan can be a smart way to pay off high interest credit card debts.
You might be surprised to learn that some banks offer home equity loan rates of as high as 5%. Transfer high-interest credit card debt to a home Equity Loan with a Rate that is less than a Third of the rate you pay on your Credit Cards. You can save money and reduce your debt faster.
Here’s a good example:
Imagine you have $10,000 in credit cards debt at 17% interest. A minimum $300 monthly payment would pay it off in 46 months. You’d also be paying $3,629 per month in interest.
It would look completely different if that debt was transferred to a home equity loans at 5.49%. The same $300 monthly payment could be used to pay off your debt in 37 months, and only $875 in interest.
Consolidating other loans
Although credit card debt can be one option for debt consolidation. You can also consolidate other types with home equity. You should choose debts with higher interest rates that you would get with a loan from your home equity.
You could use your home equity to pay off high-interest loans, such as a personal loan, private student loan, or auto loan. Home equity loans with low fees, or none, and a lower APR can help you save big in the long term.
Home Improvements
Many homeowners use home equity loans to fund important home renovations or upgrades. Your home equity will be used to improve the property. This will increase its value.
Remodeling Magazine reports that the top three investments that yield the best return on investment include a garage door replacement (93.8% of the cost), manufactured stone veneer (92.1%) or a minor kitchen remodel (72.2%).
If you are able to find value in the project, any kind of remodeling can make a lot of money. Home equity loans are a cost-effective way to remodel your kitchen. If you meet the IRS requirements, you can deduct the interest for home equity loans. This applies when funds are used to “buy or build or substantially enhance the taxpayer’s residence that secured the loan.”
Home additions
An addition to your house is another way to leverage your home equity. You can increase your property’s value by adding an addition. Additionally, you could save money on a move.
If you are in love with your home, but just need more space, you can add a family room or bathroom to increase the square footage. The home equity loan is a way to finance the project without having to draw on your personal savings.
An investment property requires a down payment
A large down payment is required if you plan to become a landlord, or to purchase commercial property. You could instead tap into your personal savings and use your home equity for the cash you need. You will often get the lowest interest rate because home equity loans are secured by your property.
Start your own business
To start a business, you can tap into your home equity. Home equity loans can be a great way to access large sums of money in a short time without needing to draw on your personal savings or get a small loan for your business.
Emergencies
Finally, some people may use their home equity in times of emergency. This is where a home equity loan (HELOC), might be better. HELOCs can be used as a line for credit, borrowing against which you can get home equity loans. They offer a fixed lump-sum, fixed interest rate and fixed monthly payment. They are similar to credit cards, but have lower rates. The equity in your home is what secures any cash you borrow.
A HELOC has the best thing about it. If you don’t borrow money, there’s nothing to repay. They are useful for emergency situations such as job loss, unexpected bills or health problems. You should compare HELOCs to get the best deal.