Smart Ways to use your Home Equity Money

Typically, with a home equity loan you can utilize the funds for just about anything – a new car, a crazy weekend in Vegas, or more intelligent things such as home improvements or paying off your high interest debts.

There are two main types of home equity loans, one is a HELOC (Home Equity Line of Credit) and a Fixed second mortgage.

Basically, a home equity line of credit is a credit card, with your house used as collateral. You are able to borrow from it at will, most lenders will give you a credit card or a checkbook attached to the account. If you swipe the card or write out a check, the balance will be added to your current loan balance. Most HELOCs are interest only payments, allowing you the flexibility of a lower payment, but bear in mind that if you make only the minimum payment, your loan balance will never go down. Additionally, HELOC interest rates are very, very rarely fixed, and typically change depending on the market.

The second option is a fixed second. This is similar to any other amortizing loan, such as a vehicle loan. You borrow $X and pay off the balance over a set number of years. The advantage of this type of loan is that you will have it paid off in a set amount of time, typically you can get a second mortgage that has a locked interest rate.

As far as what to spend the funds on, like I said – there typically aren’t any limitations. However, I would recommend spending them on something of value, as opposed to frivolous purchases. If you have high interest debt, especially credit card debt, this may be a very good option to consolidate it. Home improvements, the purchase of a vehicle, or other large purchases are also fairly good reasons.

Some advantages over a home equity loan over other options to finance a large purchase:

1) The interest is typically tax deductible

2) Often times it will be at a lower rate (especially after considering the tax advantages) than most other types of financing

3) It allows you to purchase items in “cash” – often giving you more negotiating power. For instance, if you are looking at purchasing a vehicle, you may get a better price on it if you are able to write out a check for it then and there.

Hope this helps,