“Home equity” is a phrase that’s thrown around a lot but can be hard to understand in practice. Sure, it’s a buzzword, but why is it so popular right now? What’s making businesses, marketing teams, and other advertisers so convinced it’ll drive in clicks?
I’ll be using “equity” a lot in today’s article, so I want to put this out there now: I’m referring to its meaning in economics and finance rather than the other connotations behind the word. With that out of the way, we can define it as the holdings of a business (or a property) that the owner has control over – basically, what’s been paid off on the home so far, in our context.
Seeing as it’s a bit convoluted still, you might want to read a bit more about it all on this page. It’s a pretty big deal when an individual or a business is evaluating their equity in a holding, so you’ll probably want to get familiar with this – especially if you’ve ever considered investing in property.
There’s a pretty common misconception that in order to be investing in property, you’ve got to buy some that you aren’t currently living in. However, pretty much any real estate can be considered an investment – and a valuable one at that. A lot of that has to do with the way that equity works, especially when you are later on in the terms of your mortgage.
Consumer Loans and Equity
So – how does equity relate to consumer loans, anyway? The question at hand today is whether or not you can use consumer loans as a form of equity when you’re purchasing a home. At least, that’s what we’re looking at on a surface level – I would instead challenge you to ask, “is it worth doing that?”
After all, the key component of a consumer loan is that you can use the funds that you’ve been disbursed for pretty much anything that you want (as long as it’s not, like, illegal or anything). That means that it’s totally feasible to use one as part of the equity in a home purchase if that’s what you’re looking to do.
Naturally, the “worth it” part is the cincher. When you think about a consumer loan, what are some of the characteristics that first pop into your mind? Most likely, there was something about interest rates and how high they are, right? Because that is definitely the case – most of them come with exorbitant fees because they don’t require any collateral from the borrower.
Since that’s more of a risk for the lender, they compensate for that with super high-interest rates. Honestly, it probably doesn’t sound super appealing for egenkapital, but there is a bit more to cover that might change your mind. There are a few different types of consumer loans that you could consider for this purpose.
Credit cards are one, although they’re very rarely going to be anyone’s first pick here. Rather than large purchases, they’re typically reserved for smaller ones, so it doesn’t make a whole lot of sense to spread out the equity on a bunch of different cards. That’ll get confusing pretty quickly, especially if you end up with bills for each of them.
Traditional consumer loans are usually the route that borrowers take if they want to use one for this purpose, but there are also “small” and “micro” loans. This is mostly referring to the amount that you’re able to borrow for each and can vary depending on the country where you’re getting yours from. For example, a microloan in Norway is up to 20,000 NOK.
As much as I wish I could give you a solid “yes” or “no” answer, that’s not exactly possible when it comes to stuff like this. Instead, I’ll give you some of the facts, and you can decide for yourself whether it might be something worthwhile for you. To start off, it’s critical that you understand that as far as “safe” investments go, you really can’t get any safer than real estate.
Can you think of a circumstance in which it’s a bad idea to own a home? Probably not – realistically, shelter is one of the many basic human needs. So, having a shelter to call your own is always going to pay off. What does this have to do with consumer loans and equity, though?
Putting it as simply as I can, if getting a consumer loan to help pay for the equity in a home is something feasible for you, then it’ll probably pay off down the line. There are even people who are garnering a profit this way, although that might seem a bit complicated. If that’s the case, this news piece might help you out: https://economictimes.indiatimes.com/defaultinterstitial.cms.
Admittedly, the way that it works is a bit confusing at first. You see, when you buy out more equity in your home, you are striving towards fully owning it rather than “renting” it. Obviously, when you’re making your mortgage payments, you are doing a little bit more than renting. However, it does function in a similar manner, so that’s some food for thought.
Do the Calculations Yourself (or Get an Advisor)
Perhaps this seems kind of silly, but you won’t really know whether getting a consumer loan to cover some home equity will be worth it until you sit down and crunch some numbers. Figure out whether you’ll be paying more or less each month if you go through with it – for some people, even just breaking even is good enough for them. If you’re spending less, though, that’s where you reach the “profitable” range.
Part of this process involves comparing the different loans as well – so, check out the rates that you’re offered by a few different lenders, and cross-check between the types that they offer. It’s a lot to take on as one person, of course, which is why I mentioned the possibility of getting a financial advisor or accountant.
It’s not unusual for people to get help in this regard, seeing as finances aren’t exactly the easiest thing in the world to navigate without a specific education. That’s what these professionals are there for, after all. They can also help to coach you on whether or not this is something worth your time in the first place!
When you’re able to get more equity in your home, you’re essentially raising its value as an investment. Think similar to when a business buys out some of its investors so that they can own more of their own profits – it’s essentially the same thing, just applied to another concept instead. The potential drawback here is that with a consumer loan, you might end up with a lot of extra debt accruing thanks to the interest rates.
If that’s something that you’re really worried about, then you may want to steer clear for now. After all, it’s likely that those rates are going to change many times in the coming years, and you don’t have to rush into huge decisions like this. Planning on doing it in the future is another pretty big step in the right direction.
On the other hand, if you’re confident that adding another monthly payment isn’t going to sink you financially, then you’re probably safe to go for it. Just do your best to mull it over properly and not make any rash decisions – that sort of thing generally only leads to regrets.
Overall, I would say it’s safe to fall back on the age-old advice of borrowing responsibly. Loans can be a great tool, but they can also be harmful – it’s all about how you put them to use once you’re approved.