Home Ownership

Reasons to Borrow Using Your Home Equity & Why Home Equity is Important

woman smiling at her child in their newly renovated home that was financed with a home equity loan

Home equity loans are gaining traction because they’re an easy way for you to get money quickly with a low rate. They can allow you to pay off debts, make home improvements and finance new purchases.

For every good home equity decision, there are just as many bad decisions. This guide takes a look at ways you can use home equity to help you stay financially secure, without the fear of losing your home.

Here are five of the best reasons to take out a loan against your home equity.

Home Renovation is a Good Reason for Taking Out a Home Equity Loan

Taking out a loan against home equity can be a smart move when you’re ready to plan renovations that will improve your home’s value. It’s also a great way to get more enjoyment out of your home.

Home improvements are the number one[i] use for home equity loans and home equity lines of credit because improvements can lead to better long-term investments. You may also be able to take advantage when property values increase, which would provide you with even more borrowing opportunities. You may also be able to deduct your interest payments at tax time. Consult your tax advisor for more information.

The primary consideration when turning your equity into a home improvement is to keep renovation costs within the scope of your project so that they result in an increase in your home’s value.

Financing Your Education with a Home Equity Loan 

Home equity loans are becoming a popular option for funding education because the interest rate can sometimes be lower than student loans. You also have the potential to borrow more. This gives many families an easier way to pay for their own and their children’s education.

It is important to note that some parents may not want to finance their kid’s education if it would harm their overall financial security. Using home equity to fund education may be a good idea for some, but it can be perilous if you’re approaching retirement.

Major Life Events or Emergency Costs are Another Reason for a Home Equity Loan 

A wedding, new car, dream vacation – these and many more fun experiences can be funded with your home equity. On the flip side, Job loss, major medical expenses and other unexpected events can too, and they can get expensive quickly. If you are in need of paying a major expense, a home equity loan may be a good source of funds.

Tapping equity can help you pay for fun life events or get you back on your feet when facing unexpected expenses. Your home equity can help you avoid running up credit cards or taking on other high-interest debt. In addition, home equity loans typically come with manageable APRs compared to unsecured loans, and some lenders, like Discover® Home Loans, don’t charge application, origination, or appraisal fees, and no cash is required at closing.

Debt Consolidation

Consolidating your credit cards or other loans into a single home equity loan can simplify your life and help you manage monthly bills. A home equity loan may be a smart tool if you’re looking to get your finances in order. Please know, though, that consolidation doesn’t change spending habits. You might max out your credit cards again if you’re not taking the time to address the underlying issue.

Consolidating debt can help you save monthly and in the long-term, but you’ll want to check the math carefully, because everyone’s financial situation is different.

The relative benefits of a debt consolidation loan depend on your individual circumstances and your debt payments. Interest payment savings are only possible when you make monthly payments towards a new, lower interest rate loan with an amount equal to or greater than what you previously paid towards the higher rate debt(s) being consolidated. Keep in mind, while your monthly payments will be lower, in the long term, you may pay more interest if the debt is extended over a longer period of time.

Choose Carefully

Your home equity is one of the largest and most valuable assets you have. Always keep in mind that your home equity belongs to you and is there for you when you need it. When considering your options, make sure to consult with advisors whom you trust to help you make wise financial decisions.

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