If you’re a homeowner, you may be thinking about leveraging your equity by taking out a home equity loan. Here’s how to consider whether that would be a wise decision.
One of the best things about homeownership is the building of equity – the difference between what your house is worth and what you owe on it. As you pay down the balance on your mortgage or when your home increases in value, the amount of equity that you have also increased.
Since equity is an asset, homeowners can sometimes borrow against it by taking out a home equity loan. While you can use a home equity loan for anything you choose to spend it on, some users make more sense than others. If you’re thinking about taking out a home equity loan or have other questions about being a homeowner, HomeFree-USA offers plenty of resources to help homeowners succeed. Here are some questions to ask yourself to help determine whether taking out a home equity loan would be a smart decision.
Are you using the money for something you can save for instead?
It can be tempting to take out a home equity loan, but remember that you have to pay the money back. Like any loan, you’ll have to make payments and your credit will play a role in determining the type of interest rate you’ll get. If you’re planning to use the money for something fleeting like a vacation, consider whether it makes sense to pay interest for years after an experience is over. You might be better off taking the time to save for the vacation instead.
Will the money be used to make money?
One of the smarter ways some homeowners use equity is by leveraging it to increase their income. For example, you might take out a home equity loan to make a down payment on a rental property that will bring in rental income. Or you might use a home equity loan to make home improvements that will increase the value of your house so you can sell it for a higher price. When you use home equity to improve your financial picture, determine whether the financial gain will be greater than the cost of the interest you pay on the loan.
Will the loan ease a financial crisis?
Sometimes circumstances arise and a home equity loan can help to ease a financial crisis. For example, medical bills could be wreaking havoc on your budget and a home equity loan could provide a low-interest way to pay them off. Some people also take out home equity loans to pay off credit card bills because home equity loans typically have lower interest rates than credit cards. However, think very carefully before doing this. If you can’t pay your credit card bills, you’ll hurt your credit, but if you can’t pay your home equity loan, you could lose your house.
The decision to borrow against your equity should never be taken lightly. However, if you’re a homeowner, your equity is an asset that could prove helpful if you use it wisely. If you’re still not sure or if you have other questions about homeownership, contact a Homefree-USA homeownership advisor. We want you to succeed.