What’s the Best Way to Use the Equity in Your Home?

Has your mailbox been littered with mailers and market reports about your home value lately? The Utah real estate market is hot, hot, hot, and home values are rocketing up. It’s crazy stuff to see your home value half again—or even double—what you paid. If you’ve been considering a home equity loan that will put some of that value in your pocket, the good news is that you can. But it’s important to spend it wisely. Here are four of the best ways to put a home equity loan to work:

1. Consolidation of high-interest debt. If you’re carrying high-interest credit card debt, using a low-interest home equity loan to pay them all off at once can be a smart move. Lowering the interest rate gives you more money every month to pay off your debt sooner. Fringe benefit: reducing the number of bills you have to pay also reduces the chance of missing payments and getting stung with extra penalties and interest. Just make sure you’re reducing your debt this way, not giving yourself a lower-cost way to accumulate more.

2. Value-adding home improvements. Use your home equity loan to make improvements or repairs to your home that make it worth even more. Just make sure you choose projects that add to the actual market value of your home. Not everybody will give the same value to an indoor pottery studio or a saltwater aquarium as you do, so research the projects you have in mind to see what kind of returns you should expect. This article from Realtor.com is a good place to start.

3. Emergency expenses. We’re talking about real emergencies. When it comes to using a home equity loan wisely, emergencies are things like medical bills or a job loss, things you absolutely can’t control and that absolutely have to be paid. A Black Friday sale is not an emergency. Upside-down monthly spending is not an emergency. (That’s a spending problem—start with this budgeting article for help solving it.)

4. Investment. This is another place to be careful. Yes, a low-interest home equity loan represents money that can earn more than it costs. CAN. If it doesn’t, that loss really, really hurts. This is not the money to use for speculating on real estate or playing with an unproven business idea. If you’re sure the income and growth will be greater than the cost, you’re on the right track. And don’t forget about investing in yourself. If you know an education will put your in financial shape to not only pay back the loan but be better off for the rest of your life, you’re making a smart investment.

When you think about the best ways to use a home equity loan, the key is to make sure there’s a positive return. Your home is not a cash machine, but when a home equity loan earns you money or saves it, it offers real financial opportunity.

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