What's the Best Way to Use a Home Equity Loan?

With interest rates falling and home prices rising, it seems like a good time to use my home’s equity. What’s the best way to use these funds?

A home equity loan can be an ideal way to source extra funds during a falling-rates environment. With low interest rates, the repayment plan is affordable. There are no restrictions on how to use these funds, but since you’re essentially risking your home with this loan, it’s important to choose wisely.

Here are four forward-thinking uses for a home equity loan:

1. Home improvements

One of the most popular uses for home equity is home renovations and improvements. Using your home’s equity for such projects is a smart choice for many reasons. For one, the money you put into the renovations acts as an investment. If you choose improvements that increase the home’s value, you can make back the money you spend or even see a return when you sell your home. Also, if you use the funds from a home equity loan to increase your home’s value, you may be able to deduct the interest paid on the loan from your taxes (be sure to also consult with your tax adviser).

2. Debt consolidation

Another popular use for a home equity loan is to consolidate high-interest debt. Paying off multiple debts that have high interest rates can be cumbersome and difficult to manage. Worse, the heavy interest rates mean more of the borrower’s money goes toward the lender and less goes toward paying down principal. Using a home equity loan to consolidate debt to a single and no-interest or low-interest loan can slash a pile of debt by several thousands of dollars and help shorten repayment time by several years.

3. College education

When interest rates are falling, funding a college education through a home equity loan instead of a high-interest student loan can be a smart choice. Similarly, homeowners struggling to meet their student debt payments without defaulting on the loan might want to use their home’s equity to pay off the debt quickly and replace it with a more manageable low-interest loan.

4. Emergency fund

If you’ve been struggling to get an emergency fund going, tapping into your home’s equity can be a great way to get what you need. You’ll have a large stash of cash to build your fund, and the manageable payment plan will help ensure you put money into savings each month.