Rising home values have dropped a nice chunk of equity into many homeowners’ laps. Tapping into it with a home equity loan is easy. Deciding what to do with it? Not so much.
Many homeowners reinvest the money in home improvements that add further value to their property. It’s a smart move, but it’s not the only way to spend your home equity.
Since home equity loans typically carry lower interest rates than many other types of financing you can use the funds strategically to save money on other expenditures. For example, you can:
1. Consolidate your debts.
If you’re careful, your home equity can make quick work of your credit card debt. Most credit cards have interest rates in the double digits. So let’s say you have $20,000 in credit card debt, with an average rate of 17 percent. Using a home equity loan to pay it off can save you more than $2,000 in interest, allowing you to pay down the principal even faster.
The key to making this strategy work is to stop using your credit cards. Freeze them, cut them up or lock them in a safe deposit box—whatever you need to do to remove the temptation. Otherwise, you could wind up doubling your debt load and putting your home at risk.
2. Start a new business.
Got a brilliant business plan? Your home equity can serve as seed money for your new venture. Applying for a business loan can be a long and complicated process, and approval rates are low. A home equity loan can help you get your business off the ground faster; plus, if all goes well, you could end up with a tidy return on your investment.
Starting a business is always risky, so it’s important to think it through. Does your venture have the potential to bring in more (after taxes) than what you’ll be paying on the loan? Will you still be able to make your loan payments even if your business fails? Will you have quick access to funds in case of an emergency?
3. Pay for college.
The high cost of college tuition has spurred many parents to divert their home equity into their children’s education. The low interest rates on a home equity loan may beat out student loan rates, which means you and your child could save thousands of dollars over the life of the loan. Plus, the interest you pay on your home equity loan may be tax deductible.*
Before you choose this route, however, make sure you’ve explored all your options. Taking out a second mortgage to pay your child’s way through college can delay your retirement. Compare interest rates carefully, and choose the path that will save you the most money.
4. Buy a new car.
If you’re in the market for a new car, a home equity loan can be a tempting alternative to a car loan. The interest rates are typically better, which means a lower monthly payment, and the possibility to deduct interest payments from your taxes helps you save even more.*
One thing to keep in mind: If you make only the minimum payment, your debt could outlast the car itself. A new car starts depreciating the moment you drive it off the lot, while a home equity loan can take up to 20 years to pay off. It’s best to use this strategy on a practical car you need rather than an expensive luxury purchase. Leave yourself some breathing room so cash flow doesn’t become an issue, and make more than the minimum payment each month.
5. Take a trip.
Vacations are a luxury—until you desperately need one. Although travel can enrich your life in ways no dollar signs can measure, it’s not always easy to come up with the cash when you need it. Since many people rely on high-interest credit cards to finance their vacations, a home equity line of credit can offer a more affordable option.
Many finance experts advise against spending your equity on short-term expenses like luxury vacations. But as long as you’re conservative, stick to a budget and have a plan for paying off the balance, a home equity loan can help you avoid racking up high-interest credit card debt.
Your home equity is a valuable asset. It can help you save money, boost your income, and achieve your financial goals. Just remember that you’re putting your home on the line. Invest wisely.
*Consult your tax advisor for more information