7 ways to use a home equity loan for wealth building
You want the best loan deal if you have to borrow money. You should choose loan options with low fees and attractive interest rates. This will ensure that you borrow for the best possible reasons. A use a home equity loan (also known as a second or third mortgage) may be an option. This loan allows you to borrow against your equity in your home. It is also secured by the value of your property.
What is the process of home equity loans?
A home equity loan allows you to use your home as collateral. You will usually get lower interest rates with a home equity loan than with credit cards or other unsecured loans. Fixed interest rates and monthly payments are included in home equity loans.
Because you will need substantial equity to get home equity loans, they won’t work well for everyone. Home equity loans allow you to borrow up to 80% of the value of your home, less what you owe on your original mortgage. If you have a $300,000.00 property, you can borrow $240,000. (300,000 x 0.8) You can only borrow $40,000 with a home equity loan if you still owe $200,000 to your mortgage.
You should also note that a home equity loan uses your home as collateral. If you are unable to repay the loan, the bank could foreclose your home.
Repaying credit card debt
An average credit card APR of 16% is currently available. Using a home equity loan as a way to pay high-interest credit cards bills can be smart.
Some banks offer home equity loans at rates as low as 5%. You could save money by switching high-interest credit cards to a home equity loan at a rate less than a third the amount you are paying on your credit card. This will allow you to pay off debt quicker.
Here’s an example.
Imagine that you have $10,000 of credit card debt with a 17% APR. You would make a minimum payment each month of $300 and pay $3,629 interest. This will take 46 months to pay off the $10,000 credit card debt.
The situation would be completely different if you transferred the debt to a home equity loan at 5.49 percent. You could make the same $300 monthly payment and still pay $875 interest.
Consolidating other debts
Credit card debt is one way to consolidate debt. However, you can also use your home equity to consolidate any other types of debt. It is important to choose debts with higher interest rates than what you can get with a home equity mortgage.
For example, if you have a high interest personal loan, an auto loan or a private student loan with high-interest rates and a lot equity in your home, it could be smart to use your home equity. You could save a lot of money over the long-term by consolidating all your debts using a home equity loan that has low fees or no fees and a lower interest rate.
Home equity loans are popular among homeowners who want to improve their homes. Your home equity is being used to improve your property. This should increase your house’s value.
Remodeling Magazine reveals that the three most profitable improvements for the greatest return on investment are a garage doors replacement (93.8% cost recovered), manufactured stone veneer (92.1%) and a minor kitchen remodeling (72.2%).
If you find value in any type of remodeling project, it can be a profitable one. A home equity loan is a great way to get the kitchen you want. You can also deduct interest on home equity loans if you are approved according to IRS rules. The funds will be used to “buy, construct, or substantially improve the taxpayer’s home that secured the loan.”
You can also use your home equity to your advantage by adding an addition. The addition will increase the value of your home by adding more square footage. It could also help you avoid a costly move.
You may want to add more square footage to your home if you love it but need more space. You can get a home equity loan to help pay for the project, without having to tap into your personal savings.
A down payment is required for investment properties
You can expect to pay a large down payment if you want to be a landlord or buy commercial property. Instead of using your personal savings to pay for the down payment, you can use your home equity as collateral. Home equity loans offer the best interest rates because they are secured by your property’s value.
Start a business
Home equity can also be used to fund a business start-up, whether you’re opening a franchise or starting your own company. You can access large amounts of money quickly with a home equity loan without having to tap into your personal savings, or take out a small business loan.
Some people also use their home equity to fund an emergency. However, a home equity line-of credit (HELOC), may be more suitable for this purpose. HELOCs are a form of home equity loans that offer a fixed lump amount, fixed interest rate and fixed monthly payments. These loans are akin to credit cards but with lower rates because any cash borrowed is secured by your home’s equity.
A HELOC’s best feature is the fact that you don’t have to repay any money if you don’t borrow any money. This makes them very useful in times of emergency, such as job loss, unexpected medical expenses, or a health scare. To get the best deal, compare HELOCs and be aware of fees.