Today, American homeowners have $5.5 trillion in home equity available, up more than $3 trillion since 2012. While Americans chose to tap into their home’s equity for a variety of reasons, there are certain situations where it should be avoided. Continue reading to learn more about the dos and don’ts of using a home equity loan.
Do: Make home improvements
One of the best uses for a home equity loan is to fund home improvements that will increase your home’s overall value. Renovation projects such as building an addition onto your home, updating your kitchen or putting on a new roof increase your home’s worth and offer a great return on your investment.
Don’t: Take Out More Than You Need
Even if you have the equity available, make sure to take out a home equity loan only for the amount that you need. What you take out should be used for a specific reason, rather than used as additional cash for non-essential items. When you increase your loan amount for some extra spending money, you’ll end up paying much more over time on the cost of interest. You also run the risk of losing equity in your home if the housing market declines.
Do: Consolidate your debt
Another great way to use your home equity loan is to consolidate debt from multiple high-interest credit cards. Restructuring your debt from many cards into one low-interest loan has the potential to save you thousands of dollars on interest. It also simplifies your monthly payments to help make life easier for you. Just don’t forget to be disciplined with repaying the home equity loan so you don’t end up back in a cycle of dangerous debt.
Don’t: Purchase luxury items
If you plan to take out a home equity loan, avoid using it to fund luxury items such as expensive cars, boats, vacations or electronics. Borrowing to pay for expensive, non-essential items is not a safe choice. Since your home is used as collateral for a home equity loan, if your property value declines or if you become unable to repay the loan, you put your house at risk. Although it’s tempting, remember that vacations or expensive cars are not worth the risk of losing your home.
Do: Cover unexpected emergencies
When unexpected emergencies occur, a home equity loan is a good option for covering the expenses. If you don’t already have an emergency savings account prepared, a home equity loan can cover the costs of an unexpected situation that you were not financially prepared for. These types of situations include a medical emergency, job loss or extreme weather event.
Don’t: Use it for paying monthly bills
Lastly, avoid using a home equity loan to cover monthly expenses such as your car or phone payments. Since monthly bills do not offer any return on your investment, it’s a smart choice to avoid using a loan to cover them. Instead, these payments should be factored into your monthly budget. Remember, treating your home like it is an ATM is a dangerous decision.
Now that you know more about the dos and don’ts of home equity loans, if taking out a home equity loan is the right choice for you, CTFCU is here to help. From now until March 31st, we are offering home equity loans with rates as low as 4.99% and terms at 10 years. Visit our home equity loan promotion page to learn more or visit the branch to get started!