When home prices increase as they have in the Boulder-area, homeowners gain equity in their home.
To some, it may feel like sitting on a small fortune. And with interest rates so low, many are taking out home equity loans and home equity lines of credit (HELOCs).
But what is the best use of equity?
If you are considering taking out a home equity loan or HELOC, the decision should be made carefully and with the guidance of a professional financial advisor. According to Realty Times, after careful consideration of the costs and risks involved some homeowners may find that if the money is used wisely, then taking out a home equity loan may be a good financial decision.
Here are four options offered by Realty Times.
1. Make renovations that provide return on investment
The most frequent use for a home equity loan is home improvement.
Updates that raise the value of your home can be a good use of home equity, if the homeowner has a cushion of savings or can afford the increased mortgage payments.
It’s important to keep in mind that even if the property improvement raises the value of your home, the money won’t be realized until the home is sold. And not all home improvements are equal in terms of resale value.
Realty Times points out that an attic remodel may not provide as high of a return on investment as a bathroom update. But a new front door provides curb-appeal and pays back the investment a minimum of 100 percent.
2. Finance your child’s college education
With the increased cost of college, more parents need to finance their child’s education with a loan.
If the interest rate of the HELOC is lower than another type of education financing, putting your child through school with a home equity loan may be a good choice to make. Interest rates on home equity loans are lower than the roughly seven percent charged for federal PLUS loans for parents.
Even so, adding to the debt owed on your home is a decision to make carefully, since it can result in the homeowner delaying retirement or struggling to pay off the home mortgage.
3. Eliminate credit card debt
Credit cards carry an average interest rate of more than 15 percent. Compared to a home equity line of credit of around five percent, it can make a lot of sense to use a HELOC to pay off the much higher credit card debt. In addition, the interest on home equity loans is tax deductible, which adds to the savings.
For that reason “HELOCs are often touted as a great vehicle for consolidating high-interest debt,” according to nerdwallet.com.
It’s important to remember the reason home loan interest rates are lower than credit card interest rates: HELOCs are secured by your home, which is also the reason taking out additional home equity debt should be done with careful consideration of the homeowner's overall financial health.
4. Leave the equity in the home
When you borrow against your home, you are betting that you will be able to pay off the debt, which is a decision to be made with great care.
Leaving your equity in your home and allowing it to continue to grow as real estate continues to appreciate and you pay down the outstanding mortgage is the safest choice.
But is it the best choice for you?
Consult with a financial professional to determine if that growing goldmine could be put to better use.
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RE/MAX of Boulder