When to Use Home Equity (and When to Avoid It)
Homeowners are always striving to increase their home equity. Having the possibility of a financial fall back can put anyone’s mind at ease.
But while home equity is a great way to pay for certain items, it is not always the best choice for a homeowner. Watch out for the times where using home equity could actually make a situation worse.
Making Frivolous Purchases
Always avoid making any purchases with home equity that are not going to help improve the home or improve one’s financial situation by reducing debt. Borrowing money against a home to buy leisure items like a new car or boat is not a good investment of equity.
Investing in the Home
Home equity can be a great tool to use when updating or renovating a home. It is an investment back into the house that will help to increase its value. If wanting to use home equity for a single project ask for a home equity loan.
If planning on making many renovations or updates over the course of time it may be better to use a home equity line of credit. This type of credit will allow a homeowner to borrow money against their home. They will only have to pay back what they have borrowed versus taking out the lump sum at the beginning.
Keeping the Budget Afloat
It is tempting in the time of panic to use home equity to pay for things like utility bills or even groceries, but this is another bad investment. Relying on home equity for these expenses will not help a homeowner; it will simply add more debt to their plate. Instead of borrowing the money take a look at the budget and see what needs to be changed.
Too Many Debts
Having many debts at once can be overwhelming. There are multiple payments to make and each one is racking up even more interest. Using home equity to consolidate debt is a good way to get everything in one place and reduce the amount that is being paid towards interest.
The only problem with debt consolidation is that many people choose to use it then use their credit cards again. Meaning they have even more debt than when they started. This tactic only works for someone that knows they will choose not to use those accounts until their consolidation loan is paid off.
Education
While it seems like a good use of the money it can actually cause problems for a homeowner. Avoid paying for children’s college tuition with money from a home equity loan. When people borrow that large of a sum of money later in life it makes it much harder to pay it back. Many find themselves delaying their retirement to continue paying off high debts from their youth.
Home equity is a wonderful thing to have. Homeowners should strive to build up their home equity so they do have the option to use it when needed. However, they should tread carefully when choosing what to use it on. Making poor financial decisions with a large loan can make it very difficult for a homeowner to get out of debt.