Home equity loans help you take a loan out against the equity you have in your home. Because there is collateral involved, home equity loans usually have more reasonable terms compared to other types of loans. However, home equity loans are not without risk. If you fail to repay the loan amount, your lender may foreclose your home as a last resort. Given this, it is important to avoid taking a home equity loan unless you really require the funds. Here are some good reasons to take a home equity loan:
Home Improvements
Home improvements can run into thousands of dollars. If you need funds to finance a home improvement, consider getting a home equity loan. However, it is best to only get a loan if the improvement or renovation is likely to add to the value of the home.
Emergency Expenses
While it’s always advisable to have an emergency fund to pay for emergency expenses, you can take a home equity loan if you are falling short of funds in an emergency situation.
Debt Consolidation
If you have a number of debts, including loans and credit cards, you may be paying a high-interest rate that will likely be eating into your disposable income. In such a case, it is a good idea to take a home equity loan and consolidate your debts. Since the interest rates for home equity loans are comparatively lower than that of credit cards and personal loans, the overall cost of borrowing is likely to reduce.
To Pay for Your Child’s College Tuition
If you don’t want your child to take a student loan, you can get a home equity loan to pay for their college tuition. However, keep in mind that saving for your retirement is what’s most important. If taking a home equity loan to pay for your child’s college will make it difficult for you to save for your future, you should avoid taking the loan.
It’s best not to take a home equity loan to finance luxury purchases like a sports car or an expensive vacation. Essentially, this means you should avoid taking a home loan for any purpose that is unlikely to give you a positive return.