After you are done paying your mortgage, your home equity increases and this means a higher home equity loan. This allows you to borrow money a certain amount of money depending on that equity. A home equity loan can come in handy, but it is crucial to know how to use it. It is easy for people with traditional bank accounts or checking accounts to get a HEL. This loan is a valuable investment if you use it to boost your home’s value. Unfortunately, many people squander it on other unimportant things and end up accumulating a crazy debt. It is important to know the things you should do with the loan and those you should never do. Here, we will discuss four things you should never finance with a home equity loan.
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1. Buying a Car
In the past, the interest rate of a home equity loan was lower than that of an auto loan, and many people took out home equity loans to fund this venture. However, things have changed now, and the interest rates are a bit higher. Buying a car using this loan is not a good idea. One the car acts as the security and that means you will lose it if you cannot pay. Second, you risk losing your home if you fail to pay off your home equity loan. Another reason why you should never buy a car with this loan is that this is a depreciating asset that loses its value every day.
2. Paying for a Vacation
A home equity loan has a lower interest compared to other loans. Nevertheless, it should not be used to pay for a vacation. If you have to take out this loan to pay for leisure things, it means you are not living within your means. Yes, the loan is cheaper than a credit card loan, but you should never use it to pay for a vacation. You will only end up with more debts and risk losing your home.
3. Funding Your Education
Education is vital but never use a home equity loan to fund college. You will pay off the school fee, but you only end up in a far worse financial situation. So, taking out this loan to fund your child’s college education should be the last option. Instead, try taking out a personal loan.
4. Paying Other Debts
Taking out a home equity loan to pay off another debt is also a bad idea. After all, you will only have transferred the debt. If you accumulated the debt because of lack of income or you are a spendthrift, try addressing these issues first to avoid accumulating more debts in the future. Using the loan to pay off debt will only put you at a higher risk of losing your home too. So, start by looking at the things that drove you to the debt and deal with them first.
The Bottom Line
Taking out a home equity loan for your home renovation projects can be a good idea. Unfortunately, many homeowners take out the loan for the wrong reasons like the ones mentioned above. We understand that emergencies may come up, but never lose your home’s equity with the wrong things.