Home equity is a valuable asset that most home owners accumulate over time. Trading it for cash with a home equity loan can be a less expensive way to borrow, but it should not be used lightly. It makes sense to shop carefully for home equity loan quotes before borrowing, and to prioritize uses of home equity. After all, a home equity loan uses the property as collateral, so it should only be used to finance purchases that are worth that risk.

In general, a home equity loan should be used when the following conditions are met:

• The purchase is long-term in nature
• Home equity loan quotes show a distinct interest rate advantage compared with other methods of financing
• A repayment plan has been carefully budgeted

The following are some examples of possible uses for home equity:

 

1. Debt consolidation. Because home equity loans generally carry lower interest rates than other forms of consumer credit, they are a natural choice for loan consolidation. While debt consolidation can allow borrowers to pay less interest and possibly realize a tax advantage, securing debt with a home could be a mistake if finances are shaky and foreclosure a possibility.

 

 

2. Improve the property. In weaker real estate markets, investing in improvements can be a way to add value to a home or increase its marketability. Using home equity to add space may be cheaper and involve less hassle than getting a new house if adult children or elderly parents will be moving in. Energy efficiency improvements can be recouped with lower energy costs and added value when the property is sold. Quality of life improvements may pay for themselves not in money but in personal satisfaction every day spent in the house.

 

 

3. Finance college tuition. While not representing an investment in the house itself, college tuition can be a worthy use for a home equity loan because it represents an investment that has long-term benefits and should produce an eventual financial return. Home equity financing rates compare favorably with most types of private student loans. However, there are many forms of subsidized or assisted financial aid for college, so it would be wise to compare home equity loan quotes with other forms of college financing before committing.

 

 

4. Start a business. Small Business Association (SBA) loans are notorious for the number of hoops borrowers have to jump through, and the rates may not be the most attractive. While people should put together a business plan before attempting entrepreneurship, they won't have to deal with exacting SBA requirements if they get their financing from a mortgage lender. In addition, getting a home equity loan to start a business is likely to take much less time because valuing a home is easier than evaluating a business.

 

 

5. Pay Uncle Sam. The IRS offers payment plans for taxpayers to take care of taxes owed. These plans involve setup fees, monthly interest (as of February 2008 that's 6% per year, plus another one-half percent of the unpaid balance for every month or part of the month it remains unpaid. And the IRS, not the taxpayer, gets to decide how much can be affordably paid each month. Their payment plan might not be too comfortable to live with.

 

 

6. Fund medical treatments. Medical treatments cost more than ever, and even the well-insured can be hit with more than they can handle. A complicated heart surgery can cost over $200,000, and many treatment centers want a significant portion of that paid up front. Home equity may be the best way to get top-rated care sooner for serious conditions.

 

 

7. Finance the down payment on an investment property. With interest rates and property prices at very low levels in many parts of the country, the equity in a residence may be channeled to paying for a rental house. Eventually, rates and home values will come up, and those who bought their investment properties at nice low prices while paying near-historically-low interest rates will look like the smartest homeowners of all.  

 

As a general rule of thumb, the best matches for long-term financing are long-term purchases. It may be anything from a boat to a medical procedure, as long as the home owner has reasoned that the item justifies using the home as collateral.

About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.