When compared to other loans or lines of credit, a home equity loan is typically regarded as a smart financial maneuver. The logic is straightforward: using an existing asset for financial gain or help is smarter than simply borrowing money from a lender such as a bank.
Let’s look at some specific reasons as to why leveraging your home equity is a smart play if you understand how these loans work.
It’s a Return on your Investment
This isn’t to suggest that a home equity loan is providing a dividend, because it’s not. What this means is that every month as you pay off the debt of your mortgage, you are building up equity. This equity is incredibly handy when you need a cash influx. Your home is your investment; it should be working for you.
Use it on the Appropriate Necessities and you won’t Regret the Decision
There are acceptable reasons to dip into your home equity, and if you don’t stray from these legitimate reasons then you most likely won’t experience regret.
The usual suspects are a medical emergency, home repairs, post-secondary education or maybe even to start or expand your business. A home equity loan is usually considered a good source to fund the above-mentioned expenses because they fall into the needs category and not the wants category.
Home Equity vs. Line of Credit
Lines of credit can be a viable and useful part of a financial strategy. The best part is that you only repay what you use. In most cases, the average line of credit provided by banks carries a bit more risk for borrowers that a home equity loan due to higher interest rates and less flexibility.
Avoid the Less than Smart Plays when it comes to Home Equity Loans
Anything to do with buying frivolous items with your home equity is a bad idea. Boats, cottages, cosmetic items or travel are not recommended uses. Using it for non-essential items can come back to haunt you.
Using the equity you’ve built up in your home in responsible ways can be an intelligent move and one that comes with reduced risk and won’t result in high levels of stress.