The Best and Worst Uses for HELOCs

helocHome equity is a valuable asset for every homeowner and can provide funds for just about anything. However, when deciding to tap into your home equity, homeowners should use extreme caution and decide how valuable the investment will be in a few years.

An advantage to tapping into your home equity loan is the interest is often tax-deductible. But before you decide to borrow from your home equity, make sure it makes sense to put your home at risk.

Here a three uses for cashing out your home equity that will help you in the future:

Home Improvements
Homeowners can improve the value of their home with updating the style of the home, adding square footage, and bringing the house up to code. Updated kitchens and bathrooms will add the most value to the house.

Paying for an Education
Using a home equity loan to further your education or your children’s education is an efficient way to pay for college. A higher education will also make you more valuable in the workplace.

Consolidating Debt
The most common use for a home equity loan is consolidating multiple balances into a single home loan. Since the loan is secure on your home, the interest on the loan will be lower than interest on a credit card. This can also be very risky and will require discipline. It is best to cut up all your credit cards and keep one for emergencies only, to prevent you from running up your credit card balance. If you do run your credit card balance up again, you’ll be in worse shape than before.

Home equity shouldn’t be used on things you won’t be using years from now. Anything that loses its value or doesn’t last longer than your payment for the loan isn’t worth the risk of losing your home.

You shouldn’t use your home equity on anything that gives you an instant gratification such as a vacation or a new wardrobe. Sure it’s nice to splurge on fancy resorts and the latest fall trends, but that vacation won’t help you years from now and those fall clothes won’t be in style next season.

Buying a car with home equity can be debatable on whether or not it is a good investment. Although a car loan generally has a higher interest rate, the loan typically matches the life span of the car and if something happens to you financially making you miss a payment, you could lose your home.

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