What are Home Equity Loans?
In a home equity loan, the bank lends the homeowner money based on the amount of money the homeowner can put up as collateral. The more home equity someone has, the bigger the home equity loan. Homeowners are free to use it in any way they want. Banks suggest to customers that home equity loans can pay off credit cards, pay for cruise vacations or finance the purchase of a vehicle. To be practical, there are only a handful of things people should really want to pay for with a home equity loan, but it could be used the same way people use a credit card.
Best Uses of a Home Equity Loan
Depending on how one uses the home equity loan, it can be a fantastic way to address money concerns. It can turn bad debt like credit card debt into good debt. It can be used to add significantly to the value of a home with a home improvement project. People can use the money to invest in themselves with a tuition payment at a school. It can also finance major purchases like a new car.
Debt Consolidation
A credit card is potentially a form of bad credit. Yet today almost everybody has a credit card in their wallet. The credit card is a convenient, easy-to-use financial tool that allows people to purchase just about anything when they don’t have the money to pay for it with one caveat. That caveat is to pay it back in a 30-day billing cycle. If they don’t, the banks may hit these credit card owners with big interest-rate bills and any fees they believe are owed. Those who look closely at the fine print on their credit cards may discover that they have signed away a considerable amount of leverage just to have a square plastic card in their wallet!
Other forms of bad debt include payday loans and automobile loans. Payday loans are so abusive of consumers that in many states they’re highly regulated and may even be illegal. Payday loans are loans taken against a paycheck, and the balance is due on payday. Refusal to pay means that the interest rate, already astronomical to begin with, goes through the roof. A $300 loan becomes a $500 loan in a short month. This is a debt to get off the books as soon as possible.
Automobile loans are not great credit because of the quick depreciation cars suffer over their lifetimes. A car depreciates 30% in the first three years of operation. And the interest in auto loans is often front-loaded. People run the risk of owing more money on the car than it’s worth. Even though auto loans are collateralized, the interest rate can be tough. Again, this is a debt to get off the books.
The home equity loan can help people take all these high-interest rate loan products off the bad credit side of their ledger and put them on the good credit side. Individuals can pay off the entire amount on their credit cards, get rid of payday loans, and maybe even outright buy automobiles with home equity loans!
Home Improvement
Home improvement projects can get pricey. A home improvement project can also increase the value of a home if the owner can argue that the home’s square footage has increased after it’s complete. Just about any home improvement project above ground can improve the value of a house. Owners who put an addition on the back of the house, the home’s value increases. A bedroom above the attached garage? The value of the house goes up. The list goes on.
That doesn’t mean homeowners have to add value to the home to justify using a home equity loan to improve their properties. They can use the home equity money to do any improvements, like installing a new hot water heater or furnace. It doesn’t increase the value necessarily, but new fixtures are strong selling points for putting houses on the market in the future.
Paying for School
Education might be the best investment someone could ever make, and many people borrow tens of thousands of dollars to improve their lives this way. Education can increase personal income by a significant factor, so the return on investment is high. If the student loan isn’t a needs-based loan, and if the interest rate beats that of an educational loan, a home equity loan might be a better way to finance an education.
Financing Major Purchases
Those with good money-managing skills can use a home equity loan to make major purchases. With this type of loan, individuals can buy a motorcycle if the urge hits. Other major purchases made possible with this type of loan include a car, a truck, a motor home, a travel trailer, and an airplane. Those with an automobile loan—and the loan amount is greater than the value of the car—can pay it off with home equity loan funds. They’ll have it paid off, and maybe can drive it for a few more years and realize that kind of equity.
Final Thoughts
It’s good to know the difference between good and bad credit. A home equity loan is a good credit tool, and it can solve a lot of problems!
