What’s the Best Way to Use a Home Equity Loan?
Q: With interest rates falling and home prices rising, it seems like a great time to tap into my home’s equity using a home equity loan. What’s the best way to use these funds?
A: A home equity loan, can be a fantastic way to source extra funds during a falling-rates environment. Tapping into your home’s equity, or the positive difference between what is owed on a home and its current value, will give you the funds you need for a large expense with no additional strings attached.
If you’re a homeowner, you may be sitting on a financial resource you haven’t fully considered yet: your home’s equity. As home values rise and interest rates become more favorable, more homeowners are turning to home equity loans to fund major expenses, consolidate debt, and build financial security.
A home equity loan lets you borrow against the equity you’ve built in your home, which is your property’s current value minus what you still owe on your mortgage. If approved, you receive the funds as a lump sum at a fixed interest rate, with your home serving as collateral.
But with no restrictions on how the funds are used, the real question is: What’s the smartest way to put that money to work? Here are four of the best uses for a home equity loan.
1. Home Improvements & Renovations
One of the most popular uses for home equity is for home renovations and improvements. These can be as major as adding a 1,000-square-foot extension to your home, as minor as replacing old carpet with new hardwood flooring or anything in between.
Using your home’s equity for home improvement projects is a smart choice for multiple reasons. For one, the money you put into the renovations acts as an investment. If you choose improvements that increase your home’s value, you can make back the money you spent or even see a return when you sell your home. Also, if you use the funds from a home equity loan to increase your home’s value, you may be able to deduct the interest paid on the loan from your taxes (be sure to consult with your tax adviser if you plan to go this route).
If you plan to use your home equity funds for home improvements, be sure to choose wisely. It’s best to go for improvements that add lasting value to your home instead of blowing big bucks on superficial remodeling projects that may look dated just a few years down the line.
2. Debt Consolidation
A home equity loan for debt consolidation can be a powerful way to simplify your finances and reduce the total interest you pay. If you’re juggling multiple high-interest debts like credit cards, personal loans, or medical bills, rolling them into a single, low-rate home equity loan can save you thousands of dollars and shorten your repayment timeline significantly. Using a home equity loan to consolidate debt to a single and no-interest or low-interest loan can slash a pile of debt by several thousands of dollars and help shorten repayment time by several years.
It’s worth noting that using a home equity loan to pay off debt does put your home at risk if you’re unable to keep up with payments.
Before going this route, consider speaking with a qualified credit counselor to explore all of your options. Also keep in mind that home equity loans may come with upfront fees and closing costs, so be sure to compare the full cost of the loan, not just the monthly payment, when shopping around.
3. Paying for College
When interest rates are favorable, a home equity loan can be a more affordable alternative to private student loans. Homeowners who are already carrying student debt may also consider using their home’s equity to pay it off and replace it with a lower-rate loan.
One important note: federal student loans sometimes qualify for income-based repayment or forgiveness programs. Weigh those benefits carefully before paying them off with home equity.
4. Building an Emergency Fund
Most of us know that financial experts recommend having three to six months’ worth of living expenses stashed in an emergency fund to be used if the need arises. But reality keeps this magical-sounding fund a distant dream for too many people. If you’ve been struggling to get your own emergency fund off the ground, tapping into your home’s equity can be a great way to get that boost you need. You’ll have a large stash of cash to build your fund, and the manageable payment plan will help ensure you put money into savings each month.
As a bonus, if you experience a financial emergency of any kind after taking out your home equity loan, you’ll already have the funds on hand to help pull you through.
How Much Can You Borrow?
The amount you can borrow with a home equity loan depends on how much equity you’ve built up in your home. Most lenders allow you to borrow up to 80 to 85% of your home’s appraised value, minus what you still owe on your mortgage. For example, if your home is worth $250,000 and you owe $150,000, you may have up to $62,500 in borrowable equity.
Keep in mind that your credit score, income, and debt-to-income ratio will also factor into how much you’re approved for and at what rate. The stronger your financial profile, the better your terms will be.
Is a Home Equity Loan Right for You?
A home equity loan is a great fit if you can check most of these boxes:
- You have sufficient equity built up in your home
- You have a specific, high-value purpose for the funds
- You have a stable income and can comfortably meet monthly payments
- You have a good credit score and manageable existing debt
- You’re comfortable using your home as collateral
If you’re unsure whether you qualify or how much you could borrow, the team at Mutual Credit Union is happy to walk you through your options with no pressure or obligation.
Start Your Home Equity Loan Application Today
A home equity loan can be one of the most valuable financial tools in a homeowner’s toolkit, whether you’re tackling a renovation, getting out of debt, or planning for the future. The key is working with a lender you can trust.
At Mutual Credit Union, we’re committed to helping our members make the most of their finances. Our home equity loan rates are competitive, our terms are straightforward, and our team is here to guide you every step of the way. Becoming a member is easy, and once you are, you’ll have access to a full range of products and services designed with your financial wellbeing in mind.
Ready to put your home’s equity to work? Apply online or stop by your nearest branch to get started today.