When you’ve built equity in your home, it affords you a number of viable options to better other aspects of life with improvements, repairs, or outright changes. The changes do not necessarily have to be drastic, but they must always be well deliberated. Let us examine five reasons one may seek to use an equity-release home loan.
Home Improvements Can Be Wise but Costly
One of the most common reasons to release some of the equity in your home is for home improvement. With significant equity, more square footage can be added onto the house. However, the improvements need to be purposeful, in the sense that if the house is not viewed as a long-term dwelling, money can actually be lost on improvements to the house.
The best improvements for return on investment are fixing up garage and entryways, adding new bedrooms and bathrooms, replacing a tired kitchen, putting in a deck, and laying an outdoor patio. These are the things that prospective buyers want more of.
It must be considered that the value of homes can decline. Improvements do not always ensure an improvement in the selling value of the house. Some additions such as a three-car garage may be wholly unnecessary to a family with just one or two vehicles.
Paying for Further Education
Another way equity can be used is to cover the costs of college. The average home equity loan interest was 5.85% in October of 2019, and that compares to a 4.53% rate on undergraduate loans and a 6.08% rate on graduate programs.
Besides the potential interest savings, this may be one of the more productive ways to use home equity, at least if you are a believer in the benefits of advanced higher education. It can be risky, because these loans are subject to being paid off before retirement, but many parents feel investing in their children’s collegiate education is well worth whatever dollar that they can manage to scrape up.
Clearing Debts
One of the less exciting but best ways to use a home equity loan is just to clear a debt, be it medical bills, credit card debt, or any other liens on one’s property. Debt consolidation helps pay off big debts like car loans.
Debt management is a viable way to start over with good credit by clearing more expensive debts that have higher interest rates. Responsibility must be learned but many use home equity as one last bailout from immense credit debt.
Emergency Bailouts Can Come through Equity Loans
Home equity is also a source many homeowners can choose to tap into to cover emergency costs. Medical bills certainly fit the bill here, again, as does a long period of unemployment or under-employment. There are the real nadirs in regular daily life that end up costing people a lot of money that they simply do not possess.
Accordingly, even the birth of a new child — a positively glorious event — can be marred by expensive hospital bills after the mother returns to the comfort of her home. There is nothing pretty about what happens in our nation’s medical care system, but the fact is as long as it creates immense debt people may combat this with home equity loans.
Making a Stock Market Investment
The most appealing way to use equity is to make safe long-term investments, either in the stock market or in real estate. If you can be almost guaranteed a return on investment higher than the interest rate you’ll pay on your home equity loan, you could make a lot of money simply by taking advantage of your position as a homeowner.
Avoid High-Risk Moves with the Equity Loan Funds
All in all, home equity loans can produce a lot of gains when properly applied, but when misapplied they can compound disaster and place an even tighter strangle on a person unable to pay his or her debt.
All things considered, the wise uses of an equity loan have few bounds. But doing risky things with the money released from an equity loan should be avoided.
