House prices are going up in many parts of the United States and home equity loan rates have hit record lows. So more people are starting to tap their home equity again to pay for certain things. A low rate home equity loan can be used to improve your life to make many purchases.
#1 Pay for College Education
It can make a lot of sense to borrow money out of your home equity to pay for a child's college education. The logic is that you are paying for an 'appreciating' asset, which is the education of your child. He or she will be able to earn more money by going to college, so this can be a good use of equity to improve his or her life.
Of course, there are times when you may want to limit the amount of money you are borrowing. If your child is going to medical school, chances are they will have a good salary and can help you pay down the debt eventually. However, if your child is majoring in the liberal arts, it may not make sense to take $100,000 out of your house to fund an education that results in a $35,000 per year job. Analyze how much you are pulling out and what the payments will be, and how much your kid stands to benefit with the college degree.
#2 Improving Your Home
One of the most popular uses of home equity today to improve your life is to make home improvements. Financing construction and rehabilitation is more affordable than ever mostly because home equity loan rates are so low. Now this can make a LOT of sense if you improve the right parts of the home. Some of the best things to improve on your house that are a good return on investment are:
These improvements also will make the house nicer for you to live in. But when it comes time to sell, you probably will be able to sell the house for more money. So, using your equity will end up making you money when you sell, if you do the right types of improvements. It is possible to spend too much on a kitchen upgrade for example; if you make the kitchen too nice, out of step with the rest of the home, you probably won't get your money's worth when you sell.
#3 Paying Down High Interest Debt
This is one that you should be careful with, but it can make sense in the right situations. Since rates on home equity loans have fallen again, it makes sense to Sometimes people had a high unexpected expense that led them to run up a lot of credit card debt, such as a medical expense or car emergency. Rather than paying an 18% interest rate, it may make sense to take out a home equity loan and pay 3% or 4% on that money.
However, you should not use your home equity as a piggy bank that funds excessive credit card spending. Remember: You are going to have to pay that money back, and now it is secured by your home. If you don't pay, you lose your home.
#4 Buying Rental Real Estate
Some real estate investors use their home equity to buy real estate properties to either flip or for cash flow. This is theoretically a good use of your equity because you are buying appreciating assets.
However, you need to make sure that you are investing in real estate investments that are going to turn a regular profit. There are many failed real estate investors out there that ended up losing their home because they bought rental properties that they could not rent out in the economic downturn.
#5 Investing in a Business
The same rules apply here as with buying rental properties. You should make sure that the business you are buying or investing in makes a lot of financial sense. There are many examples of people who pulled money out of their homes and put it into businesses that failed. Many people lost their homes this way during the last recession.
Using home equity can be a great financial move if it is done for the right reasons. Just make sure that you are getting a home equity loan for the right reasons and not to fund spending that you cannot really afford.