What do you use your home equity loan for? There are as many different reasons for taking out a home equity loan, as there are home equity loans. It is important to examine the reasons that you are taking out the loan, and how soon you plan to repay that money. While there may be times when you need to use your home’s equity (a medical emergency) chances are you can avoid doing it.
Many people take out a home equity loan versus another type of loan, because the interest is tax deductible. While this may seem like a good idea, you do not get to deduct the entire amount of your interest for the year, only a percentage. If it is a purchase that can wait until you save for it, it is smarter to wait.
Many people will take out a home equity loan to do home repairs and remodels. The reasoning behind this is that the repairs and remodels will help to build the value of the home, and so it makes sense to borrow the extra money against your home. You are cashing in against the equity (or the amount of home that you own), so while you may be increasing the value of your home, you are not increasing how much home you own.
Others will roll their debts into a home equity loan to spread the payments out and lower interest rate. It is not a good idea to take unsecured debt and tie it to your home. Your home is likely your largest investment, and you should treat it as such. It is important that you be able to have a paid off home when you retire. This will give you greater financial freedom in the future.
Other people plan on cashing out the equity in their home in order to pay for their children’s college. Again this is a not a great idea. Student loan interest is tax deductible as well. Also, if you fund your child’s education over your retirement, do you really want to put the burden of caring for you on you children? It is important to provide for your retirement, and then if you can your child’s education.
Others use a home equity loan as a revolving line of credit for various expenses and wants. This too can be dangerous. It is important to realize the value of your house. You do not want to cash it in for a new boat or car or vacation. These expenses can be planned and saved for. By building equity and owning your home outright you give yourself greater financial stability.
To put it another way, would you consider taking out a title loan on your car once you had paid it off? Most of us would say no. A home equity loan is almost the same thing. Granted the interest rates are better, but you are cashing in on an asset that you have already paid for. You would do better to plan wisely and save for the future.