Are you on the fence about taking a home-equity loan? It’s a serious decision – you should certainly want to preserve and improve the equity that you have in your home. But at the same time, life throws major financial needs in all of our paths. When those situations arise, a home-equity loan should be on the table.
Who should consider a home-equity loan?
You Have a Lot of Equity in Your Home
If you have plenty of equity in your home, then a home equity loan should always be a consideration. How much equity is a lot? If you have 20% equity or more in your home, you may be eligible for either a home equity loan or a home-equity line of credit (HELOC).
One of the factors that sets Monroe Bank & Trust apart from other home equity lenders is that while most lenders will lend up to only 80% of the value of your home, we’ll lend on up to 85%. If your home is worth $200,000, that could translate into an extra $10,000 of borrowing power.
You should never tap the equity in your home for frivolous purposes; it’s important to understand that it is available to you for legitimate needs. Though it’s always better to have more equity in your home than less, realize that it’s a static asset if you never use it.
In fact, it’s often referred to as dead equity. That is, an asset that you own, but one that does not serve any useful purpose. More specifically, it doesn’t generate an investment return, nor is it being used for any purpose that will either reduce your living expenses or improve the quality of your life.
Here are some examples of how you can put that “dead equity” to work for your benefit…
You Have an Uncomfortable Amount of High-Interest Non-housing Debt
It makes little sense to be paying double-digit interest rates on credit cards and other consumer debt, while also trying to protect the equity in your home. The cost of carrying the high-interest debt is eating away at your overall financial situation, even as your home equity seems to be safely locked away.
For example, let’s say that you owe $20,000 in credit card debt. At an average interest rate of 15% APR, the credit cards are costing you $3,000 per year. That’s $3,000 less that you have available in your budget for better purposes. And even worse, the interest is a pure expense – not a single penny of it goes to reduce your credit card debt.
You can pay off the credit card balance with a home equity line of credit. Equity lines typically have significantly lower interest rates, potentially saving you thousands of dollars in interest expense per year.
Paying off high-interest credit card debt using a home equity loan or a home equity line of credit makes too much sense to pass up.
You Need to Finance Your Child’s Education
Using student loans to pay for college has become a common practice. But if you go this route, you could be saddling your children with monstrous debts that they may struggle to deal with for many years.
But if you have a substantial amount of equity in your home, taking a home equity loan or home equity line of credit to pay for college is a reasonable alternative. Interest rates are comparable to typical student loan rates, and sometimes lower.
And perhaps best of all, the equity loan is secured by your home. That means that you have a major asset that you can sell to pay off the debt. Student loans are unsecured, so there’s nothing that can be sold to pay them off. That’s a major reason why students are having difficulty getting out from under those loans.
You Want to Buy a Vacation Home or Investment Property
One of the best uses for pent-up home equity is buying another property. Even though you are reducing the equity in your primary residence, you are using the funds to purchase additional real estate. That doesn’t so much reduce your equity as it spreads your equity across two or more properties.
It can also be a smart investment strategy. By using the equity in your primary home to purchase another property, you’re preserving the liquidity that is provided to you by other savings and investments. This will enable you to remain better diversified as a result of owning two or more properties, as well as having non-housing investments – all at the same time. That’s serious investment diversification!
Improving Your Home
If you are making substantial improvements to your home, it only makes sense to use your equity for that purpose. After all, you’re using the proceeds of that equity to improve the value of the home itself. It can even enable you to make the needed value-increasing improvements, while also preserving your equity position in the home.
One big advantage of using home equity to make substantial improvements is that the interest on the debt could be tax-deductible* on total loan amounts not to exceed $750,000 (from 2018 forward). That’s because interest on any debt secured by your property that’s used to improve the property may be fully tax-deductible up to $750,000.
If you have legitimate financial needs to cover, tapping the equity in your home should be one of your leading considerations. It will give you an opportunity to put that “dead equity” to work in a more productive capacity.
*NOTE ON “TAX CUTS AND JOBS ACT” REGARDING HOME EQUITY LOANS AND HELOCS: Under the tax law from 2018 forward, interest paid on home equity loans and HELOCs are no longer deductible if taken to pay expenses unrelated to the home itself. However, interest paid on these loans for the purpose of either buying or substantially improving the home remains fully tax deductible up to a total indebtedness of $750,000. You should always consult your tax advisor about tax deductibility in your specific situation.
Let’s Get Started
Contact one of our lenders by email, or by phone at (800) 321-0032, to find out what your home equity options are.