If you’re like most Americans, your house is your most valuable asset. This means you’re sitting on a virtual gold mine, and who doesn’t want to capitalize on their assets? Whether it’s remodeling your home, funding your retirement, or finally taking that vacation you’ve dreamed about since you were 10, your home’s equity can be the stuff of which dreams are made. But your home is your castle, and the last thing you want to do is destroy your castle on a whim. Before you tap into your home’s equity, consider these issues.
Why Are You Using Home Equity?
No matter how good the rate is or how financially stable you are, a home equity line of credit is a bit of a financial gamble. For this reason, you should only use it for something that will return your investment—ideally, with interest. Some expenses that might justify a home equity loan include:
- Home repairs and remodels; these projects are the leading use of home equity loans, and if your renovation increases your home’s value, it may be worth it.
- Funding your retirement, especially if you tap into your home’s equity via a reverse mortgage.
- Funding your child’s college education, since education is an investment that can produce a hefty return.
- Investing your loan, but only if you’re able to get a higher rate of return than the loan’s interest rate. Just make sure the investment isn’t a pyramid scheme or a get-rich-quick scam, since these products often market themselves as future investments.
- Medical expenses. You should only use a home equity line of credit for emergency medical costs that you can’t otherwise pay, but if it’s a matter of life or death, by all means, seek the loan. In most cases, you should be able to work out a payment plan with the doctor or medical facility.
It’s generally a bad idea to use a home equity loan to fund consumer purchases, get-rich-quick schemes, or to loan money to loved ones. With 20% of home equity loans at risk of default, you need to take the risk of default seriously. No loan to a friend, however much you love the friend, is worth losing your home.
How Does Your Home Equity Loan Compare to Other Options?
Before you sign on the dotted line, you need to research your options. Particularly if your credit is a problem, your loan’s interest could be fairly high. Be sure to explore all of your options so that you can select the one with the lowest rate. For instance, if you have access to a credit card with a 0% introductory APR, that might be a better bet—but only if you can afford to pay off the card before the introductory period is over. Likewise, if you’re a senior over the age of 62, a reverse mortgage may be a safer source of retirement income than a traditional home equity loan.
How Will This Affect Your Financial Future?
The single most important consideration governing whether you should seek a home equity loan is how such a loan might impact your financial future. Consider asking yourself the following questions:
- Is the item I want to fund something I need, or something I want?
- Will this loan mean that I have to delay retirement or work longer hours?
- Do I have the financial means to repay this loan, while still meeting my other financial obligations and maintaining my lifestyle?
- What will happen if my spouse or I end up unemployed?
A home equity line of credit compares favorably to most other loans and can be a life-saver when you’re in a tough financial spot. As with all things financial, those who do their research, educate themselves, and take their time are more likely to have good outcomes.