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Best and Worst Uses for Home Equity

Using your equity

There are many ways to use a home equity loan to meet your financial needs. However, because a home equity loan is secured by the house you live in, it is very important that you carefully consider how the loan can affect your personal security and financial future.

The Best Uses for Home Equity

The two most common ways to use home equity are to consolidate debt and make home improvements. Let’s take a closer look at each of these options:

Debt consolidation

If you have several credit cards or loans with high balances and high interest rates, using your home equity to consolidate your debt could save you money, and reduce financial stress.

When you consolidate debt using a home equity loan, you combine multiple debt payments into one monthly payment. In some cases, having one monthly outstanding debt payment, versus multiple outstanding debt payments.

You may also see an increase in your personal cash flow, since you could reduce your interest rate when consolidating your debt with a home equity loan. All the money that you save on interest can now be used to build a saving account, invest or pay down your mortgages.

One example where this is not a good loan use is if you know that you will take on more high-interest debt in the future. Know your limits, set a budget and stick to it. Then, you’ll make the most of consolidating your debt by using your home equity.

Home improvement

Whether you want to add square footage to your home or modernize interior and exterior features, using your home equity can be a good source of funds for your home improvement project. Additionally, home improvements may also add value to your home.

Home equity loans are best used for higher dollar projects. While it varies by lender, Discover Home Equity Loans offers loan amounts from $35,000-$150,000.

Although debt consolidation and home improvement are the two most popular ways to use home equity, there are also several other ways to use home equity:

Paying for school or college tuition

Education is expensive, and for high-income families, financial aid options may be limited. In these cases, home equity can make it possible for you to obtain the financing you need to provide yourself or your children with a quality education.

Financing life events and major purchases

Maybe you are getting ready for a big wedding, a new car, or special vacation. Your home equity can be an option for financing these types of purchases.

Emergency expenses

When the unexpected happens, you can use your home equity to pay medical expenses. A home equity loan can also be used to support your family while you seek employment after a job loss.

The Worst Ways to Use Home Equity

As you can see, there are a lot of good ways to use home equity, but there are also a few uses of home equity that are less than ideal.

It is usually a bad idea to use home equity for basic expenses. If you want to use home equity to pay for day-to-day living expenses, you are probably better off creating a budget you can stick to without having to dip into your home equity to continue your standard of living.

Don’t treat your home equity like extra cash. Instead, seek to use your home equity to purchase larger things that will yield a positive return.

You may also be tempted to use the cash from a home equity loan to play the market or tinker around with investments. Leveraging home equity capital for investment purposes is a complex matter, and is best avoided, or at least warrants contacting a financial advisor to discuss. If you are considering a strategy like this, it probably means there is some risk involved, so decide carefully.

To learn if a home equity loan is the right choice for you, talk with a Discover Personal Banker at 1-855-361-3435, or request a no-obligation quote online, and we’ll call you back.

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