When you borrow money for your home, you might end up with more money than you need. While the terms of your mortgage dictate what you’re allowed to spend money on, if you’re already making payments, you might be able to take a home equity loan or home equity line of credit for some extra cash. Whether you’re planning for the perfect time to remodel your home or interested in consolidating your debt, here are the best use cases for home loans.
Home improvements can not only make your home more comfortable, but they can increase your home’s market value. Home loans are a great option to finance larger home renovations that boost your home’s value over time, such as kitchen renovations, landscaping, or a basement remodel.
Maybe you’re planning to start a cooking show in your kitchen or rent out an extra room in your home. Between smaller home improvement projects like built-in kitchen appliances to bigger projects like transforming your attic into a guest bedroom, home improvements can help you design your dream home. Some other improvements that a solid return on investment include entry and garage door replacements, deck or patio installation, remodeling the bathroom, and installing a new roof.
Financial experts generally agree that people should build up an emergency fund to cover three to six months of living expenses. Unfortunately, for many homeowners in the United States, this isn’t a reality.
If you’re faced with emergency expenses—such as medical bills, car expenses, or a leak in your roof—a home equity loan can help you stay out of debt. However, it’s important to keep in mind that this is only a viable option if you have a backup plan or if you know your financial situation is temporary. If you don’t have a plan to repay your home equity loan, taking out a home loan to pay for emergency expenses can lead to significant debt.
Sometimes, homeowners use their home loan to invest in the stock market or real estate, expecting their returns to exceed the cost of the home loan. Using your home equity loan for long-term investments has risks, though, as there are no guarantees that your stock market returns will cover the cost of the loan.
Similarly, if you choose to use your home loan on investment property, there’s no way to guarantee that the property won’t lose its value. If you’re looking for an investment property, be sure to check out the property’s RP data to estimate the investment rental yield to help you make an informed purchase decision.
Ultimately, using your home equity loan boils down to the return you can achieve and the interest rate of your mortgage. While long-term investments can offer higher return rates than your current home loan rate, it’s essential to consider the risk of the investment.
Homeowners can also use home equity loans to consolidate high-interest debt at a lower interest rate. In some cases, homeowners use their home equity to pay off other loans or personal debts, including car loans, credit cards, and student loans. By consolidating debt at a lower interest rate over a longer-term, homeowners can significantly cut down their monthly expenses.
With that said, there are some downsides to using your home equity for debt consolidation. In particular, you’re turning an unsecured debt, such as a credit card, into a secured debt, which is backed by your home. Using your home loan for debt consolidation also runs the risk of increasing your credit card balance again after paying it off, substantially increasing the amount of debt you owe.
Although home equity can provide extra cash, it’s generally not a good idea to use your home loan to fund recreational expenses or monthly bills. However, for those experiencing financial challenges or increasing their home’s value, home equity loans can be a lifesaver. Above all else, it’s essential to make sure you’re borrowing money at the lowest possible interest rate.
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