When homeowners find themselves in financial stress, they often turn to home equity loans to consolidate their debt into more manageable payments. If used properly, these types of loans can save homeowners a lot of money by reducing the total interest they might pay on their debt. Unfortunately, some homeowners use these loans for the wrong reason. Before you call your lender, learn when you should and shouldn't tap the equity in your home.
Saving on interest
If you've got significant credit card debt, a home-equity loan may make a lot of sense. Because credit cards tend to charge high interest rates, consumers are often unable to pay down their balances. When you roll your credit card debt into a home-equity loan, you won't just enjoy lower monthly payments; you'll secure a lower interest rate. This means a larger percentage of your monthly payments will go toward the balance and not just to interest fees.
If your home is in need of serious repairs, you may be forced to tap your home's equity to pay the expenses. Most of the time, this is a good decision; however, it typically depends on what you plan to use the money for. If you plan to use the loan for re-roofing, gutter repair or to eliminate mold, you're making a wise decision. After all, it makes sense to address anything that compromises the value of your home.
On the other hand, when homeowners use their home equity to pay for remodeling expenses, they are usually making a big mistake. Contrary to popular belief, most home renovations add little value to a home.
Exceptions to this rule
Although most home renovations add little value to a home, some do. If you are dead set on securing a home equity loan to pay for home improvements, consider having wood floors or vinyl siding installed. These two relatively inexpensive renovations can add a decent amount of value to a home without pricing it out of the local real estate market. Homeowners can also add value by installing a generator or by transforming a basement into an office, spare bedroom or an apartment.
On the other hand, consumers should not tap their home's equity to buy a swimming pool, upgrade fixtures or add expensive wood cabinets. Typically the total cost of these upgrades tends to substantially outweigh any value added to the home's worth, especially when you factor in years of interest fees that come with the loan.
Roger writes from the Chicago area about roofing repairs in Illinois. He enjoys learning about the latest trends for a residential roofing company in Illinois.