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Historically, home equity loans were used primarily for remodeling and redecorating an outdated home. Borrowers would take the money and modernize an old inefficient kitchen or add bedrooms or a family room when the family outgrew their living space. But home equity loans can be used for many other purposes, including car loans and college tuition. But perhaps the most popular use of home equity loans today is debt consolidation.
It's not hard to see why so many people are taking out these loans to wipe out their debt. The interest rate you obtain can be far lower than what credit cards charge. For example if you owe $10,000 on credit cards that charge 19% and you just pay the minimum every month, you'll ultimately write checks totaling an amazing $46,596. But what if you had instead obtained a home equity loan that charged 9%. If you paid off this loan in five years, you would have paid just $12,455.
Some careful evaluation is necessary, however, if you expect to use a home equity loan for debt consolidation. The loan can be a great tool to break free of the grip of plastic, but only if the borrower decides to stop overspending. If you use the money to pay off your credit cards, but you continue to charge the way you did in the old days, you may actually put your home in jeopardy.
Borrowers use home equity loans for some of life’s larger expenses, because homes tend to have a lot of value to borrow against.
For example, you find that a lot of borrowers want to
- Remodel or renovate the house.
- Pay for a family member’s college education.
- Finance the purchase of a second home.
- Consolidate high-interest debts.
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