5 Reasons to Take out a Home Equity Loan in 2019

A home equity loan is a good way to get a big chunk of cash at a relatively low interest rate. But they also can cause you trouble if you use them improperly. Misuse of home equity was a major cause of the last recession. But there are good reasons to take out a second mortgage with a home equity loan.

#1 Home Improvements That Create Value

The best reason to pull out your equity is to make home improvements that add value to the property. For example, it is estimated that a moderate kitchen upgrade can add 72% of its cost to the value of the home. If you upgrade the exterior siding, this will add 78% of the cost. Adding energy efficient upgrades, such as windows, also could provide you with value to your home, as well as lower your energy bills and give you tax benefits.

Upgrading your master bathroom with a large shower and nixing the tub, as well as putting in higher end faucets can add 50% of the cost to your home's value. On the other hand, putting in a pool or major luxury items often will not pay themselves back unless you are in a very expensive neighborhood. For example, adding a $80,000 kitchen to a $200,000 house is nice, but it will not come close to paying you back when you sell. The upgrades need to be within reason for the home and neighborhood.

#2 Emergency Costs

It is always smart to have emergency funds available if something major were to go wrong with the house, someone gets sick and cannot work, etc. If you want to have the ability to get the money but do not want to pull it out and pay interest, consider the alternative – the home equity line of credit or HELOC. This also is a second mortgage, but it is a line of credit that you can tap at any time. You do not have to use it unless you need it. The only downside is if your credit situation changes, such as you do not pay your mortgage, the HELOC could be reduced or pulled by your lender. But otherwise, a HELOC is a good way to have cash available without paying interest charges.

#3 Consolidate High Interest Debt

As the US economy has been improving, interest rates on credit cards is getting higher and higher. If you have a 30% interest rate on your credit card and have $10,000 of debt, you are paying $3000 in interest. If you can get a home equity rate of 7%, you can save at least $2000 in interest per year. Then you can pay down the principal that much faster and be out of debt. While you will need to pay a higher rate than a first mortgage, a home equity loan is still some of the cheapest cash you can get.

If you decide to do this, just be careful of running up credit cards again. Then you would have your high interest debt again, plus additional debt on your home. That is how people get into a cycle of debt that can cost them dearly.

#4 Buy Investment Properties

This can be a good use of equity, but you have to do your due diligence. Be sure that the rent is going to more than cover your equity payment. Where you can get into trouble is buying an investment property that is overpriced and/or one that is difficult to rent or has a lot of repairs. Then the home can end up costing you money.

#5 Pay for College Tuition

You could be able to pay for some of your child's college tuition with a low interest home equity loan. This can be cheaper than a student loan, and you can pay it back over many years. If the education will result in the child getting a high paying job, it makes even more sense to use your equity in this way.

If you try the four above ways to use your home equity with a home equity loan, you can put yourself in a stronger financial position.

References

https://www.fool.com/investing/general/2014/06/21/the-only-4-reasons-to-use-home-equity-loans.aspx