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When Does a Taking Out a Home Equity Loan Make Sense?

  • November 15, 2021

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As a homeowner, the value of your property will increase over time. And while you’re paying off your mortgage, you’re building equity – and a secure asset. 

But tying all your money up in one asset has the disadvantage of reducing your financial liquidity. If you need cash to improve your home or pay off your outstanding personal debt, it can be difficult to come up with the funds. 

AMF Equity Loans are a way to tap into your equity, giving you access to a lump sum of cash that you can use to increase the value of your home, invest in your business, cover emergency expenses, or even consolidate your debt. 

In the following instances, taking out a home equity loan makes sense.

Home Improvement

One of the most common reasons homeowners decide to take out HELOCs or home equity loans is to finance renovations and home improvements – which makes a lot of sense. Investing in your home by upgrading it increases the chances of selling it for more profit later. 

Kitchen and bathroom renovations are especially beneficial when it comes to a home’s value. Tired, outdated bathrooms and kitchens are a big turn-off for prospective buyers, but these renovations can be costly because they usually involve retiling and replacing the fixtures. 

Tapping into the equity you’ve built to make improvements to your home is an investment in the long run because you’ll be able to sell it for more. 

Debt Consolidation

Converting your home equity into a loan is a low-cost and convenient way to get access to a lump sum of cash to consolidate your debt – and you’ll pay lower interest rates on a home equity loan than you would if you took out a credit card or a personal loan. 

Many homeowners opt to consolidate their personal debt – such as auto loans, student debt, or credit cards – with a home equity loan or a HELOC because it’s a way to repay the debt without accumulating as much interest in the long term.

Covering Emergency Expenses

Financial experts recommend having three to six months’ worth of your living expenses saved away in an emergency fund. Unfortunately, not many people have the means to put that much money aside for emergencies.

If you find yourself in unforeseen circumstances, a home equity loan or a HELOC is a smart way to build a temporary buffer during times of uncertainty.  

Bear in mind, though, whether you should choose a home equity loan or a home equity line of credit will depend on what you need the money for.

If you want to spend the money as you need it and only pay for the amount you’ve borrowed, you should opt for a HELOC. If you want a lump sum of cash that you’ll repay with fixed monthly payments, a home equity loan is the right choice. 

Financing Business Expenses

Many business owners tap into their home equity to invest in their businesses. If your business has the growth potential but doesn’t have the capital, taking out a home equity loan will save you more interest than taking out a business loan. 

However, before deciding to tap into your home equity, you should be absolutely sure that you’ll get a return on your investment if you put more capital into your business.