If you’ve built up a nice chunk of equity in your home, you might be wondering whether now could be a good time to capitalize on it. With interest rates at historic lows and home values rising at a breathtaking clip, the draw toward something like a Home Equity Line of Credit may feel particularly strong. But before pursuing a HELOC or a refinancing opportunity of any kind, it’s wise to proceed with your eyes wide open and with a concrete plan for the funds.
The fact of the matter is that there are good ways and bad ways to put your home’s equity to work. If you use it effectively, it can end up augmenting your existing wealth. But if you misuse it, you can end up behind the eight ball, financially.
Wise Uses for Your Equity
- Reinvest it into your home. By this I mean that you could consider putting your equity toward value-boosting home improvements. Seize the opportunity to update your kitchen. Close in your carport to create a bona fide garage. Transform your backyard with a practical and fashionable patio. Whatever your need and preference, prioritize those projects that are sure to give you more bang for your buck.
- Reduce your debt load. If you’re having a difficult time chipping away at high-interest balances, consider putting your equity toward paying them off. These days, the rate that you would pay on a home equity loan would be substantially lower than what you would have to shoulder with something like a credit card. By shifting your debt to a more manageable vehicle, you may come to find that paying down your balances – or even paying them off – is a much more doable prospect.
- Ready yourself for worst-case scenarios. Although it’s far preferable to have a robust emergency fund established and close at hand, having access to a HELOC can help you to avert financial disaster when a crisis strikes. But again, it should serve as a back-up, ideally; if at all possible, it’s better to be able to draw from a reserve of cash that’s not tied up in your homes.
Unwise Uses for Your Equity
- Getting away. Perhaps you’re hearing the siren call of crashing waves, warm sands, and balmy sea breezes. If you’re looking to skip town for a beach trip, don’t borrow against your house for that purpose. Remember, you want to use your money in such a way that will put you in a stronger financial position, not in such a manner as to jeopardize your home for the sake of a luxury vacation.
- Going on a splurge. Similar point here: just as you shouldn't leverage your home's equity for something like a beach vacation, you should never treat funds from a home equity loan like they're plain, old spending money. Those new video-game consoles or high-end golf clubs or expensive handbags can wait until you’ve saved the money necessary for such purchases.
Uses That Seem Sound on the Surface, But Can be Risky
- Growing capital. Some assume that it’s a smart move to invest money from home equity into equities in the stock market. They see the potential for reward in high yields and perhaps even downplay the likelihood of losses. But the fact of the matter is that, in the world of investment, loss is always a possibility. Don’t risk losing your home to market volatility.
- Some Education expenses. Perhaps you’re considering a return to the classroom. Especially if your program demands that you cut back your working and earning hours, you’ll want to consider the pros and cons of borrowing against your home in order to finance your degree.
The equity in your home can be a great tool to further the financial well-being of you and your family. But if used incorrectly, it can saddle you with greater debt and penalize you long-term. As you consider potential avenues for the equity in your home, keep this snapshot of wise and unwise uses in mind!
If you are ready to access your home equity, i-bank offers a simple online application to get you started!
