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Many borrowers use a home equity loan for debt consolidation, creating one payment to take care of all that credit-card debt. The loans also are used for a variety of other purposes, such as home improvements, education, emergencies and big-ticket purchases. Here are some ways to use equity loans: Debt consolidation: Many people have racked up so much credit card debt they have turned to home equity to ease the burden. Doing this can significantly reduce your monthly interest charges, allowing you to save or invest that much more. If you're paying a 17 percent annual percentage rate on a $10,000 Visa balance, for example, you can save a bundle over time by paying it off with a home equity loan at around 6, 7 or even 8 percent. Making monthly debt payments more manageable this way can come with a bonus -- it can improve your credit rating. Tip and pitfall -- Before you secure a loan, consider how you are going to prevent yourself from building up that credit card debt again. Cut up all but one or two cards, quit carrying them with you and start using cash more often. Home improvements: Making upgrades and repairs to a house has aesthetic benefits by making your home safer or more comfortable to live in. It also can increase the fair market value of your house. That's why many homeowners make home equity-financed improvements with an eye toward selling their property. Tip and pitfall -- Be sure the work is going to be worth what you're putting into it. Kitchen and bathroom improvements raise value the most. But if you spend $10,000 to put in a patio, a prospective borrower may not consider it worth the higher price tag you put on your home. If you're making a small improvement before selling, make sure another option such as a credit card or a personal loan wouldn't be a better way to pay for it. Also, be aware that some lenders will not give you an equity loan if they know your home is on the market, and if they do, they might charge a fee. And remember that if you've used a home equity loan, when your house sells you have two loans to pay off. Education: A loan used for university or college can pay for itself several times over if it lands the borrower a better job. More families also are turning to home equity to pay for their children's educations because the cost has skyrocketed, they haven't saved enough for it and their incomes are too high to qualify for grants or student loans. Tip and pitfall -- Post-secondary education often comes at a time when parents are close to retirement and using their equity could deplete income for later years. Those who qualify for student loans might want to choose that option instead. Or, if the student can make do with a smaller infusion of cash, parents might consider a small, discounted personal loan in their names and their child's. These loans can be structured so borrowers pay only the interest while their children are in school. Emergencies and big-ticket purchases: An equity loan can be a godsend if you lose your job. Lower interest rates also make equity loans a smart way to finance a new car, motorcycle or some other high-price purchase. Tip and pitfall -- It's a lot easier to refinance a mortgage or to get a home equity loan or home equity line of credit when you still have a job. If you're out of work, lenders are going to wonder how you intend to repay your loan. Married couples who both work have an advantage here over singles -- if one spouse is laid off and the other still has a job, they still can try to refinance. If you use an equity loan for a big-ticket item, try to match the loan length to the amount of time you'll own the asset. Otherwise, you could be paying a loan on a car you no longer own. Andre Mayer is a freelance journalist based in Ontario. |
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