When homeowners are struggling to cope with financial trouble, they frequently secure home equity loans that allow them to consolidate their debts into a single manageable payment. When used appropriately, these loans can save borrowers money by reducing their interest charges; however, when used inappropriately, they can prove costly. Before you tap the equity in your home, learn when this kind of loan makes sense and when it does not.
Lowering your interest charges
If you’re struggling with credit card debt, it may be a good idea to tap your home’s equity. Since credit cards usually charge relatively high interest rates, homeowners often have difficulty paying down their high balances. When you roll this type of debt together into a home-equity loan, you will enjoy lower interest charges and a single monthly payment that may be much lower than what you were paying before. The lower interest fees also allow more of your monthly payment to go toward your balance, which ultimately helps you eliminate debt quicker.
Improving your home
If your house needs critical repair work, you may need a home-equity loan to help pay the costs. Usually, this is a smart move; however, it depends greatly on how you plan to use the money. If you plan to use the money to pay for mold-removal, gutter repair or a new roof; you are making an intelligent move. After all, it’s smart to repair problems that might compromise your home’s value.
That said, when borrowers tap their home equity to fund remodeling projects, they may be making a serious mistake. Many people are surprised to learn that the vast majority of home renovation projects add very little to a home’s value.
A few exceptions to this rule
If you’re committed to using your home’s equity to pay for some form of home improvement, consider having vinyl siding or wood floors installed. These two affordable renovations can increase your home’s value, while drastically altering its appearance. You can also increase your home’s value by converting a basement into a spare bedroom, apartment or office.
On the other hand, homeowners should never use a home-equity loan to upgrade fixtures, add a swimming pool or make purely aesthetic improvements. Usually, the price of these remodeling projects tends to outweigh any potential value you might be adding to your home, especially when you consider the interest charges that are liable to accumulate throughout the life of the loan.