Home equity loans are a popular financial tool. They allow homeowners to access funds by leveraging the value of their property. One of the most appealing attributes of a home equity loan is its versatility. You can use a home equity loan to pay off debts, upgrade or renovate your house, or cover unexpected expenses, to name just a few options. But can you use a home equity loan for anything at all, no strings attached?
In this guide, we’ll break down the possibilities of home equity loans and look at the benefits, risks, and other considerations you should weigh before tapping into your home’s value for cash.
What Is a Home Equity Loan?
Before we talk about the best ways to use a home equity loan, let’s talk about what a home equity loan actually is. Often called a second mortgage, a home equity loan lets you borrow money using the equity you’ve built up in your home as collateral.
Your home equity is the difference between your home’s current market value and the outstanding balance on your mortgage. The most common way to build equity in a home is by repaying your mortgage. Money paid against the principal of the loan increases the amount of home equity. However, there are other factors that might impact your home’s total equity.
If you’ve made any improvements or renovations to the home that have increased its market value, you may have more equity than just what you’ve repaid on your loan. If your neighborhood has gone through a popularity boom and home prices are increasing, the market value of your home may have increased as well. On the other hand, if your neighborhood is struggling and home prices are decreasing or if your home has been improperly maintained, its market value price may decline, meaning that your total equity could be less than what you’ve paid on your mortgage.
A home equity loan is typically disbursed as a single lump sum and, much like a normal mortgage, is repaid over a fixed term with a consistent interest rate. This stability and predictability make it a highly appealing loan structure for many homeowners.
The Flexibility of Home Equity Loans
As previously mentioned, one of the things that make these loans so popular is how flexible they are to use. Unlike some loans, such as student or car loans, which are earmarked for and must be used for specific purposes, home equity loans are simply cash in your pocket and can be spent on almost anything.
So, to give a short answer to the question, “Can you use a home equity loan for anything,” the answer turns out to be, perhaps surprisingly—yes!
However, that doesn’t mean that you should use it for anything. Just because you can use your home equity loan to buy a new boat or spend a year traveling the world doesn’t necessarily make these good options. It depends on your financial situation.
However, here are some of the most common—and strategic—uses for home equity loans:
Home Renovations and Improvements
One of the most popular uses for a home equity loan is funding home improvement projects. Whether remodeling your kitchen, landscaping your yard, or adding a new bathroom or bedroom, these investments can both enhance your home’s value and make it more enjoyable to live in.
The best part of using a home equity loan in this way is that by improving your home, you increase its market value, which, based on the way home equity is calculated, means you boost your equity. It’s not quite free money—most projects have an ROI (return of investment) of around 60 to 80 percent, depending on your renovation—but it’s not nothing, either.
Debt Consolidation
If you’re juggling multiple credit card balances, a high balance on a single high-interest credit card, or high-interest personal loans, it can be a smart idea to use a home equity loan to consolidate your debt into one predictable monthly payment. Home equity loans, since you are borrowing against the equity you have in your home as collateral, typically have lower interest rates compared to other common types of credit and borrowing. This can save you money in the long term and help you simplify your finances.
However, there are risks involved with using your home as collateral, which we’ll discuss shortly.
Education Expenses
Whether funding your education or helping a child with college tuition, a home equity loan can provide an alternative to student loans for funding higher education.
Interest rates on home equity loans may be lower than those for private student loans. However, while education is an investment, it doesn’t guarantee a financial return. Also, some student loan plans have repayment or forgiveness options, like the Public Service Loan Forgiveness program for those working to help the disadvantaged, which may make them a better option for your situation.
Investments or Emergency Expenses
Life happens, in both good and bad ways. Unexpected costs like medical bills or major repairs can catch you off guard. Opportunities for investing in business ventures or other properties may suddenly become available with a short window to opt in. A home equity loan is a relatively easy way to get capital at far more manageable interest rates than credit cards or personal loans.
What Are the Risks of a Home Equity Loan?
As we’ve seen here, home equity loans are exceptionally versatile financial tools that can be used for many things, and they usually have lower interest rates than other comparable loans. However, the risk involved in all the use cases discussed above—and whatever else you can imagine—is simple: You are using your home as collateral on the loan.
If you fail to make payments, this can lead to foreclosure and losing your home. Therefore, be sure that you can pay back the loan before embarking on your home equity loan journey. Normal student loans, if you can’t pay them back, won’t result in the loss of your house, for instance.
So, while home equity loans have tons of great benefits:
- Lower interest rates
- Fixed payments
- Large borrowing capacity
- Tax deductibility (if used for home improvements—consult a tax professional for details)
There is a risk attached too.
So, talk to a local lending institution, such as Mid-Hudson Valley Federal Credit Union in New York, for a consultation on whether a home equity loan is right for your needs.
