For homeowners with significant equity in their properties--and there are, believe it or not, many such people, even with housing prices way off their 2006 highs--the home equity loan option can't be discounted.
Even if you do have a deep equity position, borrowing that money may be more challenging than you think.
However, if you make the cut, here are three uses for home equity loan proceeds that can be worthwhile.
1. Home Equity Loan for Home Improvements
As usual, the pendulum of "conventional wisdom" swings wildly from one extreme to another. In 2005, conventional wisdom called you naive if you did not tap your home equity to pay for home improvements that would add tens of thousands--maybe even hundreds of thousands of dollars--to your property value. In 2009, conventional wisdom says that home improvements often don't add as much value as you think they will, and besides, who wants to sell their house anytime soon?
The reality is that some home improvements are manifestly worth it, and others are not. If your kids are sleeping four to a room, you probably could use an extra bedroom. Improvements may be worth considering particularly if they not only add sales value to your home but will also increase your personal enjoyment of your home for years to come.
Home equity loans can be a low-cost, low-interest-rate choice for getting the money to make needed additions and improvements happen.
2. Home Equity Loan for Education
Not all college degrees are worth what they cost, but studies do consistently show that college graduates earn significantly more on average than those without college degrees. With college tuition costs sky-high and the student loan market tightened, a home equity loan may be the best choice for funding a college education. Compare home equity loan rates with prevailing student loan rates. Where else can you get a $100,000 loan at 5%?
3. Home Equity Loan to Start a Business
Again, a huge degree of caution is required when using a home equity loan to start a business. But with such tight credit markets for traditional small business lending, home equity loans may be the only option available to many entrepreneurs.
As with most major financial decisions, there are no easy rules to tell you whether taking out a home equity loan is wise. However, don't let the recent bad press about tapping home equity prevent you from taking a good look at home equity loans as an option to meet certain financial needs.
Andrew Freiburghouse
Andrew Freiburghouse is a writer and a businessman. As a partner at Los Angeles tax preparation firm Pronto Income Tax of California, Inc., Andrew has advised thousands of clients on a variety of financial matters.
