Do you think it's a lot safer and more intelligent to just make those monthly mortgage payments, and, like making regular deposits into a savings account, watch your equity quietly grow?
Not that there's anything wrong with that. But, in point of fact, home equity has real potential to work hard for you in more ways that some owners realize. And, to NOT take advantage of its power may be doing you more financial harm than you might have taken the time to consider.
For starters, not utilizing your ability to get a home equity loan to pay down your high interest credit card balances by consolidating and eliminating your credit card debt, may be hurting your credit rating. You could improve your credit rating overnight, in other words, by tapping your home equity.
Think about it.
The interest rate you'd pay for the average home equity loan could be 7% to 10% less than the rates you're currently paying for your plastic and other personal loans. So....WHY are you paying sky-high credit card rates when you're literally sitting - right this minute, probably - on a low-cost loan fund?
Let's take a moment to go back and review the basics
of home equity.
What is it, really?
Textbook definition of home equity is this: It's the current market value of your home, less the remaining balance on your mortgage. It's the actual percentage of your home you've purchased by making those monthly mortgage payments....PLUS however much your property has appreciated in street value since you bought the place.
Going back to the debt consolidation issue. There's another huge advantage to using a home equity loan to lose your big credit card balances. It's called a tax deduction. Interest on credit card or other personal debt is almost never tax deductible. But, guess what? Interest on your home equity loan is. Generally up to $100,000., depending on your situation. Cool, huh?
OK. So far we've got a steeply discounted interest rate and credit card debt elimination, credit report enhancement, plus a nifty new tax deduction - just from putting your home equity to work for you. Not bad.
But, wait. There's more. There's investment opportunity
hidden in those walls and rafters, too.
Many, if not most homeowners physically reside inside their single biggest investment. And, there's a tangible payoff for keeping it ship-shape, as well as for making improvements and upgrades.
Why? Well, obviously, we all know it helps maintain or increase the value of the property, which means a higher resale price. But, that's the simplest part. Using a home equity loan to update the kitchen, put on an addition, replace the leaky old windows is advisable.
But, just by making specific kinds of improvements, called ‘capital improvements', not only will you increase the property value, but you'll help lower your capital gains taxes when you sell.
So, by making the right TYPE of home improvement, using your own home equity as the collateral for the funds, you could get:
1. a low cost loan
2. a tax deduction
3. a low risk investment
4. a good return on your investment at sale time
5. yet another tax break when you sell
Are you starting to get interested?
The final amazing fact you should know about home equity loans is that (ta-da!) there are absolutely no restrictions on HOW you spend that borrowed money. Which is not to say there aren't smart ways and not-so-smart ways to part with it.
Some people buy cars using home equity loans. But, many financial advisors says that's not so smart because a car depreciates in value rather than increases, as your home does.
Another ill-advised use would be to spend the loan funds on living expenses. Again, think ‘investment'. College tuition for you or your kids? Now, that's a pretty smart move you might not have considered. Education is an asset that grows in value. What WERE you going to do for your second career, anyway?
There are two basic types of home equity loans. The traditional one - aka ‘the second mortgage' and a home equity line of credit. With the first type you get a lump sum loan and the interest meter starts running as soon as the funds are disbursed to you. In the latter, interest only begins to accrue when you make a purchase.
We hope we've piqued your curiosity and tickled your interest in making the most of your home equity. It's one of the perks of being a homeowner!
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