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Three Good Reasons to take out a Home Equity Loan
Author David Schneider | Dec 31,2007
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A home equity loan is a great way to gain access to money for expenses. Instead of borrowing from a bank, you are actually borrowing from yourself. This allows you to obtain far better rates and terms than borrowing from a third party. You are still taking out a loan that must be repaid, so carefully consider your reasons for borrowing.
Consolidate Debt With a Home Equity Loan
One of the best reasons to take out a home equity loan is to consolidate other debts. You can consolidate just about any debt into your loan. This includes credit card debt and consumer loans.
The benefit of consolidating these loans is to obtain a lower interest rate. The rate you’ll pay will be higher than the interest rate on your home, but it will often be much lower than credit card interest. Consolidating the debt from a 20 percent interest credit card to an eight percent home equity loan could save you hundreds, even thousands of dollars.
To decide if consolidating debt makes sense for you, compare the interest rate with the rate you can receive on a home equity loan. If the second mortgage is lower, then take out the home equity loan.
While this is a great way to eliminate your credit card debt, beware of what industry experts call “reloading.” This is where homeowners take out a second mortgage and max out their credit cards all over again. You may not be able to obtain a second home equity loan, and even if you can, you’ll only go further into debt if you reload.
Remodel Your House With a Home Equity Loan
If you have always wanted a new kitchen or bathroom but can’t afford to pay a contractor, consider taking out a home equity loan. Not only will you enjoy the new room, but you can also raise the value of your home. If your home goes up in value because of the remodel, then it means your loan is free, or nearly free.
If you don’t plan to live in your home and enjoy the remodel for a while, carefully consider whether it will really raise the value of your home. While you may think a swimming pool is valuable, potential buyers may not agree. In addition, when home prices are falling, you may not be able to raise your asking price to cover the cost of the remodel loan.
Pay for College or Other Major Expenses With a Home Equity Loan
Paying for college or other major expenses, such as medical bills, is another good reason to take out a home equity loan. Like consolidating your debts, paying for expenses requires comparing the interest rate of your expenses with the rate you can receive on a second mortgage. If your plan is to pay for your child’s college tuition, consider your age and financial plans. In some cases, it may be better for your son or daughter to take out education loans. Talk with a financial planner before making a decision. |
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