If you owe less on your home than it’s worth, you have equity. With a home equity loan, you borrow against that equity and pay the loan back in equal monthly installments for a preset number of years (typically, five to 30 years). The amount you can borrow is usually capped at 80% to 85% of available equity. For example, if your home is worth $300,000 and you owe $200,000, you have $100,000 in equity. That means you may be eligible to borrow $80,000 to $85,000 in a home equity loan.
When you take out a home equity loan, your home acts as collateral, meaning a lender can repossess your house if you fail to make payments. Home equity loans can be useful, but it is crucial to consider whether you can afford one before moving forward.
Also consider how you intend to use the home equity loan. Here are five times taking out a home equity loan makes sense.
1. You can recoup the majority of what you spend
If you take out a home equity loan to pay for a home renovation, it’s essential to understand that some upgrades are strictly for your pleasure. For example, high-end light fixtures, a house full of carpeting, or a swimming pool can add a spring to your step, but are unlikely to add much value to your property when it’s time to sell. In the case of a swimming pool, it can make your property harder to sell, particularly to buyers worried about liability or who don’t want the upkeep.
When a home equity loan is used to pay for upgrades that increase your property’s value, the loan can make sense. A minor kitchen remodel costs, on average, more than $23,000, but you’ll recoup about 78% of what you spend when