Home Equity Loan Uses (continued) Home equity loans are versatile and have many uses
If your retirement fund is offering a good rate of return, and in the late 1990's many were earning upwards of 20% per year, then borrowing on your principal could hurt you tremendously in the long run. Due to the nature of compounding, the amount you lose by borrowing from your retirement account could be far more than simply the sum of the loan amount plus interest. In this case, borrowing against your retirement fund could have catastrophic long-term results. A home equity loan would be better in this situation.
The interest on a home equity loan is tax deductible, up to $100,000. The interest on a 401(K) loan is not. That tax deduction is quite significant. If you pay taxes in the 28% tax bracket, it amounts to a tax rebate of 28 cents for every dollar you pay in interest, effectively reducing your interest by 28 percent! Bargains are where you find them, and this one is worth pursuing.
There are certainly some circumstances where you might benefit from borrowing from retirement funds instead of taking out a second mortgage, but those situations are fairly rare. A substantially higher interest rate on the home equity loan than the 401(K) loan would be one such example. If in doubt, you should consult with a financial planner.
Student Loan Consolidation - Going back to school for a Master’s degree or some other educational expense is another frequent reason for taking out a home equity loan. Under certain circumstances, student loans can be obtained at lower rates by other means, but the added advantage of having tax deductible interest works well for those who are in a position to borrow against their home’s equity. This is seen by lenders as a positive step, as the additional education tends to lead to better jobs and higher salaries for the borrower. This, in turn, makes the loan a lesser risk for the lender. This type of loan, especially if needed over a period of several years, is particularly well-suited to a home equity line of credit, as tuition is a recurring cost , and the borrower may be able to repay a portion of the loan on an as-they-go basis, allowing them to borrow against the principal more than once during the term of the loan.
Medical Bills - With millions of Americans without sufficient health insurance and with Federal legislation pending that may make it difficult to file for bankruptcy, more and more people may soon be using home equity loans to pay medical bills. One never knows when a medical emergency will strike, but the ability to tap into a fairly large resource, your home equity, comes in handy in times of medical need. This may also be a use that is well-suited for a revolving line of credit, particularly in cases of long-term illness or accident rehabilitation. A home equity line of credit makes a great “rainy day” source of funds for medical emergencies. You can apply for one anytime, and you don’t make any payments unless you actually use some of the funds.
