Given the economic turbulence of the past several years, the greatest asset that many Americans have is their home. With interest rates still near historical lows, now might be the time to tap into your home equity to help consolidate debt, embark on a home improvement project, start an emergency savings fund or even help pay for college.
Home equity loans and home equity lines of credit (HELOCs) are two of the most common ways for homeowners to borrow money by leveraging the equity they have in their home. Each offers its own unique benefits and both can offer considerable tax benefits, according to Thrivent Financial Bank.
The first step in determining which home equity product is right for you is to answer one simple question: How will I use the money?
“Many people are aware that now might be a good time to borrow against the equity in their home,” said Jill Aleshire, executive vice president of Thrivent Financial Bank. “However, slowing down and taking a closer look at how to best use that equity is the best thing you can do to start the process. “
Thrivent Financial Bank offers the following tips to help you decide if tapping your home equity is the right choice for you.
Home equity loans and HELOCS are meant to improve your long-term financial well-being, so think about how best to use the equity toward assets that will increase in value (appreciating assets). Ask yourself, “Will this earn value in the long run?” A college education or a home improvement project can be justified as appreciating investments if they result in a higher lifetime income or property value.
Emergency reserve savings
Home equity loans and lines of credit can be a good option if you are in need of protection against job loss, medical emergencies or home and vehicle repair.
First-time debt consolidation
One of the most common uses for home equity loans and lines of credit is debt consolidation. Because the interest paid may be tax-deductible and the interest rates can be lower than many creditors’ rates, some homeowners borrow against the value of their home to pay off debt.
Needs, not wants
Using your hard-earned equity for extraneous purchases is not a good use of your loan. If you don’t need the funds now, consider waiting to take out a home equity loan until you have a specific need. Borrowing once against the equity in your home can be a great way to strengthen your finances if used wisely, but be careful not to make a habit of borrowing. Limiting your loan spending to needs, not wants, is a good way to keep yourself in check.
- Second Home Equity Mortgage Loans (gomestic.com)
- Tax Benefits to Home Ownership (sandiegolocals.wordpress.com)
- Using Home Equity to Settle Your Debts (debtsettlement.com)
- Video: Deducting Mortgage Interest and Property Tax (turbotax.intuit.com)
- Scott Burns: Using a home-equity credit line to pay off credit-card debt (seattletimes.nwsource.com)
- Saving For College: Using Home Equity For College Expenses (education.com)
- Budget Cutting (education.com)
- Why home-equity loans are hard to get (seattletimes.nwsource.com)