A home equity loan allows you to use the equity in your home as collateral. With home values rising, homeowners who have equity, a much-valued resource, might be tempted to tap some of that wealth and use it for other purposes. But depending on your personal situation and how you’d like to use the equity, it may not necessarily be the right thing to do. Follow these tips to make sure you’re using your equity to your advantage.
Do:
Make home improvements
The safest use of home equity funds is for home improvements that will add to the home’s value. If you have a one-time project (for example, you need a new roof), then a home equity loan might make sense. Need access to money over a period of time to fund ongoing home improvement projects? Then a home equity line of credit (HELOC) would make more sense. HELOCs let you pay as you go, and usually have a variable rate that’s tied to the prime rate, plus or minus some percentage.
Consolidate debt
Consolidating multiple balances, including your high-interest credit card debts, will make perfect sense when you run the numbers — who doesn’t want to save potentially thousands of dollars in interest? Debt consolidation will simplify your life, too, but beware: It only works if you have discipline. If you don’t, you’ll likely run all your balances back up again, and end up in even worse shape.
Don’t:
Fund a lifestyle
Remember a decade ago when homeowners yanked cash out of their homes as if they were bottomless piggy banks to fund affluent lifestyles they couldn’t really afford? These reckless borrowers, with their boats, fancy cars, lavish vacations, and other luxury items, paid the price when the housing bubble burst. Property values plunged, and they lost their homes.
Pay for basic expenses/bills
Basic expenses like groceries, clothing, utilities, and phone bills should be a part of your household budget. If your budget doesn’t cover these and you’re thinking of borrowing money to afford them, it’s time to rework your budget and cut some of the excess. You will only end up deeper in debt until you lose everything.
Finance college
This may seem like an attractive use of home equity for those with college-age children. However, the potential consequences down the road could be significant. And risky. Remember, tapping into your home equity may mean it takes you longer to pay off the loan. It also may delay your retirement, or put you even deeper in debt. Furthermore, as you get older, it will likely be more difficult to earn the money to pay back the loan. You don’t want to jeopardize your financial security.
Don’t squander your equity! A home equity loan should be looked at as an “investment,” and not as “extra cash” when making spending decisions. For more information, call Helen today at 847.967.0022 or email [email protected].
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