The equity you have in your home is an asset. Therefore, if you apply and qualify for a home equity loan or home equity line of credit (HELOC), you'll want to put the money to wise use. Keep in mind that even though a home equity loan is a convenient and accessible financial tool, you'll be securing the loan with your home as collateral. That's why you need to consider how you spend the money as an investment that will bring you some sort of beneficial return.
Pay college tuition. A home equity loan offers another borrowing option for paying for college. Consider it an investment in your own, your spouse's, or your child's future earning power.
Home equity loans generally offer lower interest rates than student loans, which means your monthly payments will be lower too. You also may qualify to take an interest tax deduction when you itemize deductions on your federal income tax return. While the interest deduction is higher if you use the loan money to buy, build, or improve your home, you may still qualify for a deduction if you use the money to fund higher education.
Make home improvements. You can use the money from a home equity loan to make home improvements, particularly if your home has risen in value giving you more equity. If your home needs upgrades, you can finance the projects at a low rate of interest.
Renovations can increase the equity in your home even more by increasing its resale value, but not all improvements get you a 100 percent return on the money you spend. Unless it's a remodel you really need and you plan to remain living in the home for a while, the investment may not bring in the return you expect. For instance, if you spend $11,000 on a bathroom remodel, you won't necessarily increase the value of your home by that same amount. However, the investment may be worthwhile if it makes your family's daily life more comfortable.
Pay medical expenses. When unexpected medical expenses occur, a home equity loan can help relieve the anxiety of having huge medical bills hanging over your head. Home equity lenders offer a variety of repayment periods for which you will have fixed monthly payments for the term specified in the loan agreement.
Aside from the lower interest rate you will pay than if you took out a personal loan to pay off your medical debts, the interest you pay on a home equity loan may be tax deductible, reducing the cost of the loan. You may also be able to claim a tax deduction for the medical expenses you pay.
Supplement retirement income. You may decide to borrow against the equity in your home as a source of additional income during your retirement years. But instead of taking out a home equity line of credit that has a draw period and then a repayment period as set in the terms of the loan, a reverse mortgage gives you another option. You don't have to make monthly payments since the loan isn't repaid until you die, move out of the home, or sell the home.
Pay off high-interest credit cards. You can get out of credit card debt faster by using a home equity loan or home equity line of credit to pay off the outstanding balances you owe. Since borrowing against your home's equity comes at a lower rate of interest, you will save money in repaying a home equity lender rather than a credit card company. The higher your credit score, the lower the interest rate a home equity lender will offer.