Nov 18, 2016 6:04 PM

What is a home equity loan and why do I need it?

Bank of NH

What is a home equity loan?

A home equity loan or second mortgage can be a source of money to fund your major financial goals, such as paying for college education or medical bills, and can prevent building up credit card debt with high interest rates.

That's good and all, but why would you need it? This is why.

Use equity to renovate

Home improvement is "the No. 1 use" of home equity loans and home equity lines of credit, or HELOCs.

Second on the list are major purchases, which these days are more likely to be vehicles, appliances or other durables rather than lavish weddings or exotic vacations.

The upside is clear if you bought a home you don't completely love and want to remodel, whether that means an addition, cosmetic changes, kitchen and bathroom updates, finishing a basement or building a garage.

Use equity to invest

Home equity can be used to invest for a higher return as long as interest rates remain low.

However, this is a risky undertaking since the stock market has a reputation for crashing at times.

Use equity as a student loan

A HELOC or home equity loan can be an attractive way to finance a child's education because the interest rate might be lower and the maximum loan amount higher than some other types of education financing.

But this strategy isn't risk-free either.

Use equity as retirement income

Some retirees use a HELOC to meet their current income needs in years when their investment returns aren't sufficient for that purpose.

But again, there's a risk because eventually the retiree will have to make payments on the HELOC.

Another option is a reverse mortgage, which allows seniors to borrow against home equity without making payments. Instead, the loan is repaid when the senior dies or moves out of the home or the home is sold.

Use equity for emergency fund

A HELOC or home equity loan can be a handy alternative to keeping a large sum of money in a low-rate bank account for emergency savings.

However, one downside of this strategy is that a major life catastrophe can trigger a path to home foreclosure.

Does any of this sound useful or enticing? You can go into any Bank of New Hampshire or visit their website to learn more!

-*- This article has been sponsored by Bank of New Hampshire -*-

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