Home equity line of credit (HELOC): This is a line of credit secured by the home, which lets you borrow funds if and when needed, up to a set maximum credit limit. You only have to repay the funds you borrow. HELOCs are typically used for:
* Home improvements
* Emergency funds
* Medical expenses
* Debt consolidation
The best use of a home equity loan or home equity line of credit is when the money you borrow increases your home's value via renovations or repairs, as this continues building the equity you're borrowing against. You may also have tax benefits for using the loan toward home improvements, so it's recommended to consult a tax professional.
When NOT to use a home equity loan or HELOC
Because these loans use your home as collateral, remember that you'll want to be sure you can stay on track with loan repayments. For this reason, financial experts advise against using home equity to borrow for things including:
A car purchase: An auto loan is usually a better choice for purchasing a new or used vehicle. Interest rates on auto loans tend to be similar or lower than home equity loans, and auto loans usually require little paperwork and fewer fees.
Vacations: It's better to save up for near-term wants like vacations or large-screen TVs than using your home's equity for something offering no financial return.
College: Consider all options - including federal student loans, scholarships, grants and private student loans - before tapping into home equity. A home equity loan may be a consideration if current mortgage rates are significantly lower than federal student loan rates, especially for graduate or professional degrees. But unlike federal student loans, if you use home equity to pay for college, you won't qualify for income-driven repayment plans or loan forgiveness programs.
Starting a business: Your best bet for launching a business is a business loan through a financial institution or the U.S. Small Business Administration (SBA). If your business fails and you have a home equity loan or HELOC you can't repay, you're putting your home on the line.
Recurring expenses: Using home equity to cover everyday bills can be a slippery slope. Consider your long-term ability to repay the loan. Since your home is your collateral, missed payments could lead to foreclosure.
Make a smart plan
Your home equity is a valuable resource for managing your finances. Planning ahead and understanding your repayment responsibilities is crucial for making the best use of a home equity loan or home equity line of credit. For more information and to explore your home equity options, visit NavyFederal.org/equity. Navy Federal is federally insured by NCUA. Equal Housing Lender.
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