A friend suggested we get a home equity loan to cover our daughter’s wedding this summer. This makes me very uncomfortable, but I want my daughter to have her big day.
Money for Matrimony
Dear Money for Matrimony,
I have a very wise friend that always responds to my questions with the same reply: “This is a question that demands some education!” What he is somewhat jokingly telling me is that he will explain the why behind his answer before he actually answers. Well, I sense the same opportunity with your question. I need to talk about home equity loans before I talk about financing your daughter’s wedding.
Understanding a Home Equity Loan
A home equity loan is a type of second mortgage. Funds are taken from the equity—the difference between the home’s value and the mortgage balance—and repaid over a certain period of time. For some, it is an easy and practical way to access cash. Equity is typically used for big expenses and can be more cost-effective than credit cards or personal loans with high interest rates. These loans average 6.36% compared to 15.96% for credit cards and 11.79% for personal loans (March 29, 2021).
Home equity fluctuates based on the market. Currently, home prices are climbing in much of the United States, but property values could plunge should we experience some catastrophic event. In 2007, home prices hit a high, then they steadily fell 35% by 2012.
A Motley Fool article at fool.com, “The Only 4 Reasons to Use Home Equity Loans,” approves these uses:
- Home improvements that add value
- Know what buyers will pay for in that location
- Emergency expenses
- Large medical bills, prolonged unemployment, or an unexpected situation
- Consolidating high-interest debt
- Requires discipline to repay and the ability to stop adding to debt
- Funding investment properties
- Only if the total mortgages are less than 80%, rent covers the payments, and the property is in high demand
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SOURCE: Crown.org, Chuck Bentley