How to Use Home Equity Wisely

Equity in your home can be a blessing and a curse. Many lenders offer home equity loans, which -- unlike a traditional mortgage -- can be used for virtually any purpose. You can take a lump-sum payment or open a credit line, which can be used as needed. While an equity line may seem like the solution to your problems, it is still ultimately a debt that must be repaid. But if you're smart and use the money wisely, you won't have a problem.

Consolidate your unsecured debt. A 6 percent home equity loan is much more favorable than a 19 percent credit card. Additionally, the longer terms available for equity loans allow you to pay less per month.

Improve your property. Replace old appliances, fix broken windows and doors or put on an addition. By putting money into your property, you will increase its value, which in turn will increase the equity.

Purchase a vehicle. Depending on your credit and your auto dealer, the rates on an equity loan may be higher, but the longer terms available on an equity loan will give you a lower payment. But weigh your options carefully as you will pay more interest over time.

Invest the money. Placing money in a retirement account, a certificate of deposit or investing in stocks and bonds can all build your nest egg for the future. This scenario carries risk, however, so consult a financial adviser before investing your equity.

Pay for your children’s education. Again, the terms available for an equity loan can be more favorable than a student loan. Additionally, you will start paying immediately rather than deferring the payment for several years when your financial situation may be different.

Save the money for an emergency. Home equity lines of credit let you use the money as needed. If you have an untouched credit line you will have peace of mind knowing that you have funds readily available in case of a medical emergency or some other unforeseen scenario.

Tip

  • When you consolidate debt, consider paying making extra payments on the principal of the equity loan when possible. This will allow you to get rid of the debt and build back your equity faster.