A homeowner may elect to use the home equity they have accumulated for a number of different purposes. The interest rates on Home Equity Loans (HELs) or Home Equity Lines of Credit (HELOCs) are generally much lower than credit card interest rates. These types of loans use your home as collateral for the debt ― and the more home equity you have, the more you can borrow against your home.
For pre-determined cash needs with a known due date, a Home Equity Loan (HEL) with a fixed interest rate may be your best option. HELs can be used to finance home improvements, such as replacing a roof or updating the heating/cooling system. For many homeowners, Home Equity Loans provide an opportunity to make energy-efficient upgrades.
A Home Equity Line of Credit (HELOC) is a revolving loan that extends a line of credit to the homeowner, which they can withdraw upon as necessary. HELOCs can be used to pay for recurring costs (such as medical bills or college tuition) as well as unanticipated expenses.
[Note: If you are planning on making energy-efficient improvements, you should also look into any Federal Tax Credits that may apply.]
Ways You Can Use Your Home Equity
These are some of the most common uses for home equity (via Home Equity Loan or Home Equity Line of Credit):
Debt Consolidation ― Many homeowners use their home equity to consolidate debts because the interest rate on a home equity loan is lower than the interest rate on a credit card. Currently, the average credit card APR is around 18%, with some institutions charging as much as 28% APR!
Home Improvements ― Making the right home improvements can enhance the value of your property. Popular improvements include roofing, heating and air conditioning systems, solar panels, deck installations, kitchen and bath renovations, and upgrading appliances.
Educational Expenses ― Tuition and education fees; room and board
Medical Bills ― Unexpected costs (not covered by insurance) and emergencies
Major Purchases ― Automobiles; recreational vehicles; vacations
Investments ― Real estate; financial; small businesses; collectibles
Business Costs ― Office equipment; home office installation
Above all, it is important to realize that however home equity it used, your home is the collateral on the loan. A home equity loan will carry the same risks and penalties as your first/original mortgage. Therefore, if you default on a home equity loan, you could lose your home to foreclosure.