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.
4 thoughts on “Should You Tap Into Your Home’s Equity?”
Agree with your article. A home equity loan should only be used for really important stuff. I would never recommend anyone to use this loan to fulfill their wants. That is just a really bad idea that can get you into deep trouble in the long run.
I had a choice to tap into my home equity few years back for medical expenses. But, I decided not to because I considered this as one of the last resort. And, what I did was to look for other sources of money. For those in a tough situation now, there are surely other ways we just have to research and educate ourselves.
Personally I would rather not tap into my homes equity. I don’t like having my house at risk if I cannot make the payments. Sure the interest rate would probably be lower than a credit card, but I would rather use that than my house.
The only reason I can think you would want to tap into your home equity is for investment purposes. You mention only doing this if you can get a higher rate of return than the amount you’re paying in interest on the HELOC. I guess first I’d say that many rates aren’t guaranteed when investing, so it’s going to be some what of a crap shoot. Second, I think you can look beyond just standard investment vehicles.
When I think “invest” I think it is anything that will add future value, usually to the home. So an “investment” to me could be a very smart, frugal, and effective kitchen remodel (you mentioned home improvements) that will increase your home’s long-term value. Another investment to consider is making your home more “green”- so things like solar panels, energy efficient windows, and new attic insulation. These can all reduce your energy costs (long-term) and be great for the environment.
The last thing I’d add is from my own personal experience. I worked for a Fortune 500 bank as a credit analyst for years, and I saw people abuse their HELOCs to no end. From my vantage point, it’s not the intention, but the execution where there’s a problem in our economy. Yes, people would intentionally use their HELOC to take lavish vacations, pay off debt, or buy new cars (and they would be proud to tell us this, while asking for more credit). However, something just “happens” to many human brains when we see $20, 30, 40,000 for our use. Someone may have intended to use that for a home improvement, but ultimately found some excuse to spend it another way.
It’s all about self-control and strategically planning when you access your home equity line.