When purchasing a home, many banks provide additional credit with home equity loans. Most common are the ones you can draw on in increments over a number of years and then pay back later. Often these loans have a floating or adjustable interest rate that is tied to the federal rate, plus a percent or two. You can use this money and only pay interest on the initial draw period. This makes it a very tempting offer that is difficult to resist.
It becomes very tempting to use this money for a variety of needs as well as wants. Knowing when to use this money and on what can take much discipline. Many families use this as a loan on home repairs or remodeling, room additions or landscaping. I have heard of many families using this as an advance on trips, new cars, campers or vacation options. Whatever you use this money for, make a plan to pay it back.
The good thing about the home equity loan is that the interest it is usually tax deductable. This makes it more enticing as credit cards no longer have that benefit. The other inviting piece is that you usually have 10 – 20 years draw and can put it on a back burner for another day.
The down side of these loans is that whatever you by usually depreciates before you begin to pay it off. If you did some remodeling or added a room, you may see an increase in the value of your home, if the market bears the value. If you took a vacation or bought a new car, the value passes almost instantly.
If you must use equity loans, have a payback plan. Plan in advance as to how you are going to make the payback, how much each month until it is paid off. Plan to make the entire payback in 12 – 24 months and stick to your plan. Have heard of the “slippery slope”? Here it is.