But a home equity loan or home equity line of credit can quickly become yet another burden for those who have trouble managing their finances. Worse, defaulting on a home equity loan or home equity line of credit can mean the loss of your house.
If you’re contemplating applying for a home equity loan or home equity line of credit, it’s important that you know the conditions and terms of a home equity loan and how to use the money wisely to avoid falling into a financial pit that pulls you further into debt.
According to the experts, the main problem with a home equity loan or home equity line of credit is that many borrowers see them as an easy answer to their current money woes. They take out a loan to obtain funds to pay their current bills (credit cards, etc.), and then continue using those credit cards for more purchases. Now they find themselves not only saddled with more credit card debt, but the added problem of repaying the initial loan
Financial experts term this situation “reloading” and borrowers may soon find themselves contemplating tempting offers of home equity loans or home equity lines of credit that offer more than their house is worth (sometimes 125 percent). These loans come with exorbitant fees due to the fact that since the loan is for more than the house is worth, it is not secured by any collateral. The borrower usually then goes on to use the credit cards they have just paid off and the cycle of debt continues.
That is why it is important for those with poor or bad credit to have a plan ahead of time when contemplating a home equity loan or home equity line of credit and to use the money wisely to make the transaction benefit you. Some wise uses of home equity loans or home equity lines of credit are:
Debt consolidation
Although the credit card scenario that was described above is a troublesome one, it doesn’t have to be. Debt consolidation is the most popular reason borrowers take out a home equity loan or home equity line of credit, but there are indeed those who continue on to use the cards they have just paid off. By using the home equity loan to consolidate your credit card debt, you can close off all of the cards to prevent the temptation to use them again and have only one lump sum to pay. And people who consolidate their debt often find that their interest rates are far less than even that of the average credit card. Also, the interest rate on the home equity loan or home equity line of credit will also be lower because the loan is secured by your house. Finally, having one bill to pay will ultimately improve your credit rating, always a good thing for those with poor or bad credit.
Put the equity back into your home
Using a home equity loan or home equity line of credit for home improvements may only be the second most popular use of a loan but it might be the wisest. By making improvements to your home with a home equity loan or home equity line of credit, you are increasing the value of your home, thus maximizing the money’s potential. The best improvements are the ones that add to your home’s upkeep and modernization, not merely add another luxurious but unnecessary feature. For instance, kitchen and bathroom renovations and bedroom additions are always popular improvements that increase the value, but unnecessary additions such as a hot tub, sauna or pool add little to the value to the home. Also, major home improvements should be done by a professional. Improvements that blend in naturally with the home and the neighborhood are always worth more to the value of your home than haphazard work done by an amateur.
Start your own business
Using a home equity loan or home equity line of credit to start your own business is a great way to put the money to a wise use. It requires a sound business plan and dedication, but if it succeeds it will help pay off the loan itself. In addition, creating a business office in your home, rather than renting out space elsewhere, will also help to increase its value.
College tuition
With college costs continuing to rise, taking out a home equity loan or home equity line of credit to pay for your child’s college education is a wise investment of the funds. By giving your child the best education possible, you can prepare them for the increasingly competitive job market and, in turn, give them the chance to be financially independent sooner than most, thus freeing you from being responsible for them financially. The one trouble spot with using a home equity loan or home equity line of credit for college tuition is that most children enter college around the time that most parents are contemplating retirement, so you may want to look at other tuition options (scholarships, student loans with lower interest rates, etc.) before tapping into your home’s equity.
Big-ticket items
While most experts don’t recommend using a home equity loan or home equity line of credit for items such as a car or boat, but if those things are necessary to your continued income, it may be worth the effort.
Emergencies
Homeowners can find themselves in a dire situation at anytime. The loss of a job or the need for an emergency medical procedure can devastate a family physically, morally and financially. In situations such as these, a home equity loan or home equity line of credit may be the fastest and easiest way to get funds quickly to cope with these hardships. Use a home equity loan or home equity line of credit in these situations only after you have exhausted all of your savings and all other options have been examined. The prospect of losing your home because you defaulted on the loan will only add to the burden.
