A home equity loan can be a great way to leverage your home’s value and get a little extra cash when you need it. However, just because you can qualify for a home equity loan doesn’t mean you should get one. Home equity loans, also called a second mortgage, allow you to borrow against your home’s value. Given that you’re risking your stake in your most expensive purchase, it’s important to understand when home equity loans make sense and when they don’t
Below are a few examples of when home equity loans can be a good idea.
Remodeling
One of the best uses of a home equity loan is to pay for projects that add value to your home. While there is still risk anytime you borrow money, getting a $5,000 loan to add $10,000 of value to your home is a pretty safe bet. Just make sure you can afford the payment plan.
Debt Consolidation
If you owe money to multiple lenders, using a home equity loan to pay off all your small debts and consolidate everything into one larger debt can actually save you some money on interest. However, it does defeat the point of consolidation if you go rack more debt on your freshly paid off lines of credit.
Now let’s look at an example of when it’s not a good idea to use a home equity loan.
New Toys
Boats, cars, RVs, and other fun toys are not a good use of a home equity loan. Using the money for none essential items that will depreciate in value is a good way to lose a lot of money. Keep in mind the bank is only giving you this money because you’re willing to potentially give up some of the value of your home. So using home equity to buy a boat is like trading an asset that will appreciate in value for one that will depreciate.