4 Common Uses for a Home Equity Loan

A home equity loan is traditionally used to add value back into the home, with things like property repairs. This application is often the wisest way to spend the money, but there are a number of viable reasons to take loan using home equity as security.

#1 Expansion and Improvements

The primary use of home equity funds is improving the home. This can include expanding the home through adding an addition or just making improvements to the existing structure. If you are using a loan for this reason, it is important to pick changes that will add value. instead of just add to your personal enjoyment of the property. For example, redoing a kitchen or bathroom will add more value than adding on a home theater. Adding value through the loan means you will actually increase your total equity once the loan is paid off. This is a form of reinvesting the money, and it can be used long-term to constantly grow the value of your initial home investment.

#2 Safety Improvements

If your home needs safety improvements, these should be made before any other changes. Common examples include repairing cracks in the foundation, replacing water heaters, repairing roofs, replacing windows or bringing electrical and plumbing work up to date. Though these changes are not as fun as other changes, and even though they may cost more than cosmetic adjustments, they will actually be more likely to return 100 percent of the investment than any other changes to the home. A home that is not safe to occupy cannot be resold at a high value, and a future purchaser would need to make the changes if you do not. Make these adjustments for your own safety as well as the long-term viability of your investment.

#3 Continued Education

Home equity can be used to purchase items that do not have to do with the home. However, it is best not to use the money on any item that is purely a luxury item and will not provide any return. If you do this, you are trading in equity without gaining any equity in return. One expense that will return value despite not being attached to the home is a continuing education degree. You can use home equity to return to school to finish a college degree, get a new career certification or even pursue a Master's degree. You may even use a home equity loan to finance college for your children.

#4 Emergency Expenses

Ultimately, there are times you will not have a choice but to spend money on an item that does not return value. For example, you may have an emergency medical expense you cannot afford to pay out of pocket. Using an unsecured loan, like a personal loan or cash advance, will cost much more than a comparable home equity loan. Allowing your home to serve as collateral can be a great way to cover these emergencies without going too far into debt. It is important to repay the loan as soon as possible, though, to replace the equity in the home.