One of the most valuable financial resources you have available to you may be the roof over your head. That is, the equity stored in your home. By taking a home equity loan or home equity line of credit, you will have the option for creative uses for the home-equity funds. Those uses can not only enhance your lifestyle, but they can also improve your overall financial condition.
Here are examples of how to do just that.
Using Home Equity Funds to Create a Low Cost/No Cost Home Improvement Strategy
We’re not talking about getting crazy customizing your home with the types of improvements that might be rewarding to you, but of limited appeal to anyone else. It’s important to remember that tapping home-equity reduces your investment in your property. For that reason, you should use home-equity funds on projects that are most likely to increase the property value and enhance its appeal. That approach will make the venture part home-improvement and part equity enhancement – a win-win!
Some home improvements yield greater increases in value than others on a dollar-for-dollar basis. For example, some of the most cost effective improvements include potentially low cost projects such as increasing space (by eliminating walls and clutter), adding energy efficient heating and cooling systems, replacing flooring, upgrading the entryway to your home or simply adding a fresh coat of neutral colored paint.
While you might be able to pay for any of these upgrades without resorting to financing, performing several may require the use of home equity funds. If you can focus your home improvement efforts on the projects that are most likely to increase the value of the home, your tapping of home equity can actually be financially neutral – higher indebtedness offset by a higher property value. You can think of that as a low-cost or no-cost home improvement strategy.
Paying Off Credit Card Debt
This is probably the most traditional use of home equity funds, and it usually makes abundant sense. If you are paying 10% to 15% on credit card debts, it will make sense to refinance those debts into one home equity loan or line with a low single digit interest rate. It can save you thousands of dollars per year, and tens of thousands over several years.
This is another example of borrowing home equity funds without hurting your overall financial position. Since you will be using the proceeds to pay off credit cards, the effect on your net worth will be neutral. You will simply be replacing high interest credit cards with low interest home-equity funds. That will improve your cash flow, which should also eventually enable you to increase your net worth.
Just make sure that if you use home-equity funds to pay off credit cards that you stop borrowing against those cards. The worst-case scenario is one in which you use home equity funds to pay off credit cards, and then quickly run up those balances again.
Making Investments – But Not the Kinds You Might Expect
We’re not talking about borrowing money against your home and using it to invest in the stock market. While some people may do that, keep in mind that it can be a risky strategy, because stock market returns are often very erratic. You can even take a substantial loss on your investments, while you’ll still be obligated on your equity loan. You should consult with a trusted financial advisor before deciding on this.
What we’re talking about here is investing in much broader terms than the stock market. For example, home-equity funds can be the perfect source of capital to start your own business. It can also be used to invest in additional training that could enhance your career. Both activities have the potential to increase your income, and that’s why they represent real investments.
Still another possibility is using home-equity funds as a source of capital for the down payment on the purchase of other real estate. This can be either a vacation home or investment property. In either case, you’re tapping the equity in your home in order to purchase equity in other real estate investments.
These are the kinds of investments that are likely to improve your net worth and income over time. And they can be a lot less speculative than the traditional kinds of investments people make in the financial markets.
As a Student Loan Substitute
Student loans have reached the status of virtual necessity for today’s college students. But student loans also have significant negatives attached to them. For one, they typically represent very large loan amounts, sometimes rivaling mortgages. For another, unlike a mortgage or car loan, there is no asset securing a student loan that could be sold off to pay off the loan in the event that you ran into financial difficulty. And finally, federal student loans cannot be discharged in bankruptcy.
Home-equity funds are one of the very best alternatives to student loans. Consider the advantages:
- Many people have sufficient home equity to cover most or all of the expenses that would normally be financed by student loans.
- Home equity loans have what are among the lowest interest rates available to consumers, and generally lower than those on student loans.
- The home can be sold in order to extinguish the debt, should the need arise.
In short, home-equity funds can leave a young person in a much better financial position graduating from college. Even if he or she is made primarily responsible for the payments on the home equity loan after graduation, these loans leave the student with a lot more options, and far fewer burdens than is typically the case with student loan debts.
When all is said and done, the equity in your home is one of the most valuable and flexible financial tools that you have. Never use home-equity funds for frivolous purposes. But that still leaves a lot of opportunities to use those funds to create financially rewarding options in your life.
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Contact one of our lenders by email, or by phone at (800) 321-0032, to find out what your home equity options are.