Being cash strapped might not be a great situation to be stuck in, but retreating into a shell isn’t the way either, because you need to come up with practical solutions to get out of this mess as fast as you can. Home equity loans can help in such cases, but before you proceed, you need to conduct thorough research about how they work and in what way they can be useful.
How Do Home Equity Loans Work?
You get the full amount of the loan at once, unlike home equity line of credit, where you take money as and when required. The interest rate is generally fixed, but is lower than those on credit cards and you have to pay off the loan within a certain time frame – the terms will vary.
What Can a Home Equity Loan Be Used For?
This is where you need to be careful. Even though you can pretty much use the money for anything, you shouldn’t spend it recklessly or else your home will face an enormous risk. Think, plan, and chalk out your expenses in an organized manner – buy necessities of lasting value or enhance your financial position. Home equity isn’t for buying latest gadgets, going for an expensive trip, etc.
Here are a few suggestions:
- Consolidate your debts under a single home equity loan. It will simplify your life as all debts are structured as a sole entity, and you route the payment through one channel only. Thus, you can clear off payments in a hassle-free way.
- Use it for home improvement. It doesn’t mean installing a costly bookcase that you don’t really need, but focusing on necessary upgrades. Consider the long-term economic value of the project and how long you expect to remain in the home to enjoy the outcome.
- Only after exhausting federally sponsored alternatives for covering college education, can home equity loans be taken into account. There is a particular amount you are able to deduct in student loan interest, which depends upon your income. Investing in education is a good idea, as long as it doesn’t stunt the overall financial security of your family.
Before applying for a home equity loan, make sure you can repay it. Even if it is an economical option, you need to pay it off eventually, while keeping protecting your home at the same time. Avoid impulse buys and whimsical decisions – every decision should be taken after weighing the pros and cons.