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When to Consider a Home Equity Loan

Home equity loans can help people meet a variety of financial needs. With this type of loan, you let the equity you have built up in your home pay for other expenses in life.

  • Unexpected Expenses. Home equity loans often have the lowest interest rates of all loan types. A home equity line of credit can bring you peace of mind knowing that you have a source to tap into for emergency expenses.
  • Home Improvements. There is no better way to finance home improvements than with a home equity loan, as the money stays in the home. Use a home equity line of credit to repair the roof, install energy-efficient windows, upgrade the kitchen, or even add space for a growing family. Wise home improvement projects will increase the value of the home whose existing value (equity) funded the project in the first place.
  • Debt Consolidation Credit card rates are sky-high; home equity loan rates are quite low. It’s a no-brainer. If you have student debt or a personal loan, all the more reason to consolidate.

3 Benefits of Home Equity Loans

Here are some of the benefits to taking out a second mortgage or a home equity line of credit.

  • Extended Repayment Terms. Home equity lines of credit offer flexible repayment terms. Some don't require payment in full until you sell the home. Extended payment terms don't give you permission to let the debt linger, but it's a nice benefit.
  • Payments on Interest Only. Home equity lines often require only a payment based on the interest you have accrued, making for much lower monthly payments.
  • No Closing Costs. Most home equity lines of credit have no closing costs and require no money from you out of pocket. Others might have closing costs, but they’re minimal. The right lender can roll any fees into the home equity loan itself.

Take the Maximum With a Home Equity Line of Credit

Something to consider when you take out a home equity line is that lenders will give you lower interest rates for larger loans. It may be a little scary to take out more money than you need, but with a little discipline, having more money at a lower interest rate is worth it. A smart use for the extra money is paying off crazy-high credit card debt or student loans. Also a great idea is to use the money to pay down the home equity loan itself, now that it has helped you secure the lower interest rate. Just be sure the lenders won't penalize you for doing this, but generally they will only impose penalty fees if you close out the line of credit too soon. A good mortgage broker will have more strategies like this for you to try, so make sure you develop a good relationship with your broker to take advantage of all the advice they have to offer.

Interest-Only Equity Loans Can Mean Quick Cash With Low Payments

If you need money fast at a low interest rate, a home equity loan may be your best option. The best feature of an equity loan is that you can often obtain a larger amount of money with a low interest rate and even low monthly payments. Payments on an equity line are based on interest instead of the principal.

Wise Investing of Your Home Equity Loan

If you are going to cash out your home equity to invest in a money-making venture, be sure you realistically weigh the risks. Make sure your new investment does not harm your ability to pay back your mortgage. Consult a financial advisor before using a home equity loan for any money-making venture. Protect yourself and protect your home by making good decisions based on quality information.

Retirement Planning Considerations With a Home Equity Line of Credit

Home equity is a tremendous asset and not to be squandered. For some homeowners, equity is their largest single retirement investment. You shouldn't use this money for vacations or shopping; it should be used for home improvement (a reinvestment in the home), to free yourself of more expensive debt, or for financial emergencies.

Another good use of your home equity is to invest in a retirement fund. An IRA or other long-term growing investment will turn your home equity line into more money. Consult a financial planner to determine the best ways to reallocate your investments. They can help you assess whether it’s better for you to leave the equity in your home instead of putting it in another financial venture. Follow the advice of a professional.