As the housing crisis continues to fade into our past, home prices continue to climb. Combine that with the regular payments you make on your mortgage, and you may find yourself with a decent amount of equity in your home. Should you let it sit there or make use of it?
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We discuss your best options below.
Invest in Your Home
The best use of your home equity is using it to
improve your home. If you have changes you want to make or there are necessary repairs, you can put your home’s money to good use. You invest the money right back into your home. If you make any improvements that upgrade or raise the value of the home, you just obtained a decent return on your investment.
Of course, not every change you make will increase the home’s value. Do your research before starting to see the impact that the changes will have. If there won’t be much of an increase in your home’s value, you may want to give it some more careful thought. This is especially important if you will sell the home in the near future. If you have hopes of gaining that money back, but the improvements you made really have no effect on the home’s value, you could be sorely disappointed.
Make a Large Purchase
If you have a very expensive purchase to make and you don’t have the cash lying around to make it, you may need to borrow it from somewhere. Whether it’s a physical object; you want to take a lavish vacation; or pay for a wedding, you need a large sum of money. Credit cards and personal loans often have much higher interest rates than home equity loans or lines of credit, though. If those are your only options, looking to your home may be the better choice.
You have several ways you can tap into your home’s equity for this purpose. Some borrowers take a HELOC or 2nd mortgage. With these loans, you keep your first mortgage as is and tack on another mortgage in second lien position. The proceeds from the loan come to you directly either in one lump sum with a 2nd mortgage or in an account to be used as a line of credit with the HELOC. Other borrowers take a cash-out refinance, which refinances their first mortgage into a loan with a larger amount, leaving you the difference in cash.
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If you opt for this method, though, make sure you watch
the closing costs as they can add to the expense of borrowing the money.
Pay for College
You can take out student loans to pay for college, but it may cost more than a home equity loan or line of credit. After you exhaust all avenues for financial aid, look at how much it might cost you to use your home’s equity to pay for college.
Before you use your home’s equity to pay for college, give it careful consideration. Did your child apply for all scholarships that could be available to him or her? Did you look at all federal student loan options and compare them to the interest rate and fees a home loan would cost? Is your child (or you) going to college with a definite major and career path in mind that will help put him/her (or you) in a higher income bracket? If you or your child will make more money with the degree and you don’t have any ‘free’ options, using your home’s equity can be an affordable way to pay for college.
Consolidate Debt With Your Home Equity
This last option should be done with careful consideration. You can use your home’s equity to
consolidate debt, but only if you are the type of person that can avoid overspending in the future. For example, let’s say you have $20,000 in credit card debt. You wrap that debt into your home loan, taking away from your home’s equity. Now you have $20,000 in available credit on your credit cards. Don’t use it! If you do, you start right back at square one except this time you also have a larger mortgage to go along with the credit card debt.
Before you use your equity for this option, make sure you have a good plan in place to handle it. Closing your credit cards isn’t always the best option since that can lower your average account age, damaging your credit score. But, if leaving them open will be too tempting for you, it may be your only option.
Is it a good idea to tap into your home’s equity or not? It’s a personal decision. Weigh the pros and cons of using it, making sure to pay careful attention to how long you plan to stay in the home. Once you decide to use your home’s increased value to your advantage, find the loan that has the best terms and lowest closing costs to help you make the most of the situation.
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