Having equity in your home is a wonderful thing! Taking out Equity in your home to spend on a fancy car or the latest fashion trend is not something you should do. In fact, in today’s real-estate market, the only reason that I believe you should take equity out of your home is to use it on paying down higher interest debt or to use the money to improve your home’s resale value.
Examples:
Let’s say your home is currently valued at $300,000 yet you bought it at $200,000. You put $20,000 down and took out a loan for remainder: $180,000. You have been in the home for 3 years and paid down $40,000 of the $180,000, so you are NOW in the home for $140,000.
Equity in the home: $300,000 (appraised value) - $140,000 = $160,000 equity in the home.
Ok. Hypothetically you have $20,000 in credit card debt that you are paying 9.9% on.
After taking a hard look at your home, you think that it would improve the value of your home to update the kitchen – projected costs = $30,000, which adds a projected resell value to the home of $50,000.
A $50,000 home equity loan will have an interest rate of 7%. Taking out a home equity loans in this situation will save you roughly 2.9% (depended payoff timeframe) on the $20,000 and give you an added competitive boost on selling your home, not only at a better price but for the intangible value of a more enjoyable kitchen – causing you to cook more, which actually saves you more money in the long run.
This above example is a great way to use the built up home equity in your home.
Buying a car (depreciating asset) or trendy clothes (big time depreciating asset) is not a good way to spend the money – makes you feel good for a few minutes or days but then you need to buy something else to get that fuzzy, peachy feeling. An ongoing, pointless cycle!
Please spend the money you take out for a home equity loan wisely.
All the Best,
James Nexus
CompareYourLoans Contributing Editor
