Home with equity.

Should You Use Your Home’s Equity?

Thinking about taking on a home equity loan? There are a number of reasons that tapping in to your home equity might make sense and some reasons that you should avoid doing so. Let’s take a look.

Why Use Your Home Equity?

Let’s start with the affirmative part of the argument. Why might you want to tap into your home equity. It is a serious decision, but there are certainly reasons why you might want to do so. Here are a few valid reasons to use your equity.

1) You Need To Make A Major Repair Or Renovation

Some home repairs and just about all home renovation projects are expensive. If you do not have the money to come out of pocket, a loan will be in order. If you take on a personal loan for just the renovation, the interest and the monthly payment could be substantial.

A Home Equity Loan or Cash Out Refinance can allow you to pay for your home project with a much lower interest rate and payment. If you have enough equity in your home, you could even be able to cash out and actually lower your monthly payment. It is hard to beat getting the renovations you want and lowering your monthly bills in the process.

2) To Pay For Your Child’s College

Private college loans can be very expensive and mortgage rates are typically at least a few points lower. Using the equity in your home could save you thousands of dollars in additional interest and it can allow your child to graduate college without a huge debt burden on their back.

The average debt for a college grad is well over 25,000 dollars. This loan debt is a huge burden on most graduates and keeping your child debt free can allow them to get started on the right track and give them a leg up on life.

3) Credit Card Debt Has Finally Caught Up To You

The average household has over 10,000 dollars in credit card debt. The minimum payments on these credit cards alone can add hundreds of dollars to your monthly expenses and wreak havoc on a budget. If you have home equity, one of the most useful ways that you can put it to work is to eliminate credit card debt. Save thousands of dollars a year in interest, lower your monthly bills and increase your credit score.

If you go this route, just be sure to not cancel those paid off credit cards. It might seem like the smart thing to do as it would help you avoid temptation in the future, but this would be a major problem. Cancelling credit cards would reduce your available credit and this will actually lower your credit score.

4) A Wedding Is In Your Future

The average cost of a wedding in the United States is approaching 30,000 dollars, not a cheap sum. If you do not have that much money in cash, and most do not, a personal loan is an option but the interest rate and large monthly bill would be challenging on any budget.

A better way to fund a wedding, whether it be yours or a child’s, is to use that home equity. Pay a fraction of the interest and get that dream wedding without the stress of financing. As an added bonus, you may be able to afford more of a wedding because of the greater availability of funds, but don’t let that get you carried away. The more you spend, the less money you have for savings and investments.

5) In Order To Start A New Business

For some, the ultimate goal in life is to be their own boss, but this comes with a risk. The reason that many businesses fail is under capitalization. Not having enough money to properly launch a business can put you at risk of failure from the start.

If you tap in to home equity to pay for a new business venture, you can be sure that you have enough capital to make things work. In addition, getting the funding in this manner will allow you to avoid a huge monthly payment that could be a burden on your new enterprise.

Why You Should Not Use Your Home Equity?

It is obvious that there are reasons to use your home equity, but now let’s have a look at the other side. Here are some reason to avoid using your home equity.

1) To Pay For A Luxury

The equity in your home should be used to better your financial future. It should not be wasted on something that does not improve your financial outlook or better you in some way. Wasting your home equity on something that depreciates like a boat or luxury vehicle should not be considered. This is not you accumulating an asset, it would be purchasing a depreciating liability.

As bad as such a purchase would be, even worse would be blowing the money on something that returns absolutely no long term value such as a vacation. Once that money is spent, it would be gone with absolutely nothing to show for it. If you need to borrow money for a vacation, you do not need to go on a vacation.

2) To Make An Investment

Investments come with risk. You may or may not make money on an investment, but your home’s value is almost assuredly going to increase. Over time, practically every home will appreciate. That means that what you would be doing would be taking money away from a winning investment and putting it into a risky one.

Posted by
James Car

James Car is a finance, loan and budget expert based in the United States. After attending Brookhaven college, he went on to become a successful entrepreneur. He now enjoys writing articles that help people save and make the most of their money.