A home equity loan often referred to as a second mortgage, is when you borrow against the value of your home. This type of loan gives you the opportunity to tap into your home’s built-up equity. Your home equity is the difference between the amount your home could be sold for and the amount that you still owe. Home equity loans are often issued for home improvements, to pay for a new car or to finance a college education. The downside to this is that your lender can take possession of the home if the loan is not repaid.
Ways to use equity loans are as follows:
Home Improvements: Making upgrades and repairs to a house can make the home safer, more energy-efficient, more comfortable, better looking or a combination of all those things. It can increase your home’s value. This is an efficient use of equity debt – deploying it in such a way as to make the house more valuable. If you want to spend equity money to prepare the house for sale, make sure you apply for the loan before putting the home on the market. After you officially put your house up for sale, you will have trouble finding a lender willing to extend the loan.
Debt Consolidation: Many people rack up a lot of credit card debt and turn to home equity to ease the burden by using their equity to consolidate the debt. Doing this can reduce monthly interest charges because credit card interest rates often are more than 10 percentage points higher than rates on home equity loans and credit lines.
There is a dark side to using equity to consolidate other debts. You might be tempted to run up the credit-card balances again, leaving you with a big debt and no equity. It might be best to cut all but one or two cards, stop carrying them with you and use cash more often.
Education: Sometimes, the easiest way to pay tuition and fees for the kids’ private school or for college or technical school is to turn to home equity. This is especially true for families whose incomes are too high to qualify for grants or student loans.
Medical Expenses, Unemployment, Big-Ticket Purchases: An equity loan can be a godsend if you are hit with thousands of dollars in medical bills or you lose your job. Tax advantages and lower interest rates also make equity loans an option when financing a car, motorcycle or some other high-priced purchase. Many a homeowner even use the equity in the primary home to make a down payment (or the entire purchase price) on a vacation home.