Wise Uses for a Home Equity Loan

The equity in your home is just sitting there. It can be tempting to put the money to good use. As with many things in life, there are both good and poor options for home equity loans. Use the money wisely and you can potentially enhance your financial position or save yourself from disaster. Choose poorly and you’re digging yourself an even bigger financial hole.

There are several good uses for a home equity loan:

1. Home improvements. It makes sense to use the money you take out of your home to improve your home. This can be a wise use of a home equity loan, especially if you choose your improvements wisely. Some add more to the resale value of your home than others. If you’re planning on selling in the near future, new carpet and paint can be selling points.
   
2. Pay off high interest debt. Why pay 19% on your credit cards when you can pay 5% on a home equity loan? This use of a home equity loan can save a lot of money and makes good financial sense.

• There’s one caveat: You can’t use your credit cards irresponsibly and get yourself into the same situation all over again. This is a common result. Be careful.

3. Emergencies. Sometimes emergencies happen. It would be much better and less risky to have an emergency fund, but a home equity line of credit can be handy when the inevitable financial disaster occurs. Again, be responsible.

A home equity loan can be a useful tool when used wisely. Unfortunately, there are a few common uses for home equity loans that don’t make good financial sense.

There are also several poor uses for a home equity loan:

1. Paying for a vacation. Does it make sense to risk your home for a trip to Disney World? Borrowing money for something optional isn’t a wise use of credit, especially when it can potentially put you out in the street.
   
2. Buying consumer goods. A new TV? A 1967 Mustang? A pool in the backyard? These aren’t wise ways to spend the equity in your home. If you can’t pay for these things without borrowing money, you can’t afford them.

It can be tempting to use a home equity loan to pay for a trip or a few new toys, but it’s not a financially sound decision. A few other options are questionable.

Some uses for a home equity loan are questionable:

1. Investing. Why not borrow money at 5% and use it to earn 12%? You can come out 7% ahead, right? The logic is sound, but you can’t be certain of your return. What if you lose it all? Can you afford to keep your home? Experts consider this to be a poor choice for most investors.
2. Use as a student loan. Maybe. Think about the long-term ramifications of increasing the debt-load on your home. You’re postponing your retirement. If you do go this route, it might make more sense to use the equity in your home to finance an engineering degree rather than a history degree.

Home equity loans can be a convenient source of funds for any purpose. It’s important to objectively determine if that purpose is wise or not. Avoid the temptation to spend the money frivolously. The key to using any line of credit is responsibility. Remember that it’s not an unsecured loan. Your home is at stake, so practice caution.