When Do Home Equity Loans Make A Smart Financial Move?

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home equity loans

The benefits of owning a home go much beyond having a living space that you own. Home equity is another advantage that homeowners have. Essentially, it is the difference between the amount you owe on the property and its current value. It serves as a smart financial tool because you can easily borrow against it and the interest rate on such loans is much lower than credit cards and personal loans. Moreover, these loans are easy to pay back because you get an amount in a lump sum and repay in smaller installments over a period of time. However, you should use a home equity loan wisely and for the right reasons. Here are some instances where this form of borrowing makes a smart financial move.

High-value home improvements

If you have renovation and upgrades lined up, leveraging your home equity is definitely a wise decision. These improvements will obviously increase the value of your property in the long run, which is a major advantage.  Even while you are borrowing against equity, you actually end up increasing it. However, make sure that the kinds of improvements you invest in are not frivolous but actually worthwhile in terms of significantly adding to the resale value of the property.

Related: Eight Affordable Ways to Renovate Your Home

High-interest debt consolidation

Homeowners having other debts that are accumulating interests at a considerably higher rate can use home equity loans to consolidate such debts. You can check out these loan options at Americanbankofmissouri.bank and use them to manage your debts smartly. Debt consolidation helps in more than one way; while managing a single debt is easier as compared to handling multiple debts, you also end up saving significantly on interest payable on such debts. And this is also an opportunity to get your finances back on track.

Related: Best Home Equity Loans for 2020

Real estate investment

Another good reason for taking a home equity loan is for making long term real estate investment. While you may be taking a debt on your existing property, you are exchanging it for an asset that has the potential to generate income. For example, you may invest in a rental property that pays handsome rental income month after month. Or you may retain it for some time and sell it subsequently for high profits. In any case, you make enough money to pay off the loan. Still, the idea is justified only if you are a seasoned investor and know the real estate market well enough.

Related: Due Diligence in Real Estate Investment

Emergency fund

Ideally, everyone should have an emergency fund with at least six months’ worth of expenses to be financially secure. This fund can rescue you during a financial crisis. Still, an emergency fund is not something easy to consolidate. Using a home equity loan for building one is a good move because it can save you from the hassles and risk of taking a high-interest loan in a crisis situation. You can have the money tucked away for such emergencies and keep clearing the equity loan in easy installments.

Related: Financial Emergency: Are You Prepared?

Considering these financial choices, home equity definitely makes a great tool for homeowners. Still, you need to use it wisely and for the right reasons rather than for useless expenses.