Jul 20,2006 00:00
For most Americans, their home is their biggest investment and their most valuable asset. Home equity, or the value of your home after all loans have been paid off, can be a source of value and long-term wealth. In fact, according to SMR Research, Americans have more than $11.2 trillion in home equity.
Before you borrow against your home, it's important to have a plan for repaying the home equity loan. "You don't want to put your home at risk. But if you need to renovate your home or pay for college, using your home equity could be the right choice," says Matt Coffin, president and founder of LowerMyBills.com, a free online service where consumers can shop around for the lowest rates on monthly bills and reduce the cost of living.
Chances are the interest rate on a home equity loan or line of credit will be substantially lower than the interest on your credit cards. And in many cases, the interest payments on a home equity loan are tax deductible, making them even more attractive.
To get the best rates and the most appropriate loan for your needs, it pays to shop around for the best deal. Web sites like www.LowerMyBills.com make it easy to find and compare various loan options. Here are some tips on how to use your home equity wisely.
* Pay off outstanding debt - "Credit card interest rates can be 10 or more percentage points higher than home equity loans or line of credit, so if you are dealing with mounting debt, it can make sense to pay off those credit cards using a lower-interest home equity loan," says Coffin. Just make sure to cut up the credit cards first. It would be a mistake to use your home equity to pay off your credit card debt, only to start racking up a new round of debt.
* Pay for college - Many families are stuck in an awkward position where they make "too much" money to qualify for low interest student loans or scholarships, but too little to realistically be able to pay for college tuition out of pocket. A home equity loan can be a smart solution.
* Finance big ticket purchases - Tapping into your home's equity is an attractive way to pay for larger one-time expenses, such as a wedding or the trip of a lifetime, even a new boat. "But don't spend it like you've just won the lottery," cautions Coffin. "Remember, this is money you have to pay back."