Is your home equity making you broke? You might want to give the boat some second thought. If you have home equity, a valuable resource, you could be tempted to use that money for other things. A smart method to achieve this is with a home equity loan, which enables you to utilize the equity in your property as security. But if your circumstances are unique, it might not be the best course of action.
When to take out a home equity loan and when not to.
DON’T: Fund a Lifestyle
Recall the days when homeowners stole money from their houses to support luxurious lives they couldn’t truly afford? With their expensive vehicles, yachts, trips, and other luxuries, these careless borrowers paid the price when the housing bubble burst. They lost their homes when real estate values fell.
Learned lesson: Don’t waste your equity! Consider a home equity loan as an investment rather than extra money to spend.
DO: Make Home Improvements
The safest use of home equity cash is for renovations that increase the house’s value. A home equity loan can be appropriate if you need money for a one-time project (like a new roof).
A home equity line of credit (HELOC) would make more sense if you need money over time to pay for continuing home renovation work. HELOCs often feature a variable rate that is linked to the prime rate, plus or minus a certain percentage, and allow you to pay as you go.
DON’T: Pay for Basic Expenses and Bills
Although it should go without saying, your home budget should include funds for necessities like food, clothes, electricity, and phone bills.
It’s time to revise your budget and eliminate some of the extra if you can’t afford these and are considering taking out a loan to pay for them.
DO: Consolidate Debt
When you do the math, consolidating many balances—including your high-interest credit card debts—will make perfect sense. Who wouldn’t want to avoid paying interest that may cost them thousands of dollars?
Consolidating your debt will also make your life easier, but use caution—it only works if you are disciplined. You’ll probably run all your balances back up again if you don’t, which will leave you in an even worse situation.
DON’T: Finance Collage
This could seem like a wise use of home equity if you have kids who are close to college age. However, long-term repercussions can have a big impact. And dangerous.
Remember that paying off the loan may take longer if you draw on the equity in your property. Additionally, it can postpone your retirement or increase your debt. Don’t risk your financial stability because it will likely become harder to earn the money necessary to repay the loan as you age.
For more help with your property or queries regarding buying, selling, and investments, feel free to contact ResidenceHQ via email or call, or you can visit us too!