March 17th, 2018 7:37 AM by Jackie A. Graves, President
equity in your home can be a good way to access cash quickly, but you should
have a good reason for doing so. After all, you’re borrowing against the roof
over your head.
you get a cash-out refinance, home equity loan or home equity line of credit
(HELOC), you must use caution. Here are five common ways to spend home equity
money, along with the potential dangers.
1. Make home improvements
improvement is one of the main reasons homeowners take out equity loans or
lines of credit. Besides making a home more comfortable and attractive to live
in, upgrades could raise its value.
But if you
plan to sell the house, be mindful of the types of improvements you make. A
common mistake is using home equity to add a giant TV or some feature that does
not really increase the value of the home, says Rick Sharga, executive vice
president of Carrington Mortgage Holdings in Orange County, California.
thinking about selling your house soon, you want to be cautious about how much
you spend on what because there’s a limit to how much you can get over the
market value on a house,” Sharga says.
estate folks will say new paint and carpeting, and maybe some upgrades to the
kitchen or bathrooms help the value of the house.”
2. Pay for education
A HELOC or
home equity loan can be a good way to fund a college education because the interest
rate might be lower than the rate on a student loan.
education to potentially put yourself in a higher income bracket — that’s a
huge positive for using home equity,” says George Pantelaras, director of
consumer direct/internet production at Planet Home Lending in the Tampa area.
tapping your home equity, however, look at all of the options for student
loans, including the terms and interest rates. Defaulting on a student loan
will only hurt your credit, but if you default on a home equity loan, you could
lose your house.
3. Pay off credit cards or other debts
HELOCs or a
home equity loan can be used to consolidate debts to a lower interest rate.
Homeowners will often use home equity to pay off other personal debts such as a
car loan or a credit card.
become dangerous, however, if the homeowner runs up the credit cards again
after using home equity money to pay them off.
planning on tapping home equity to pay off debt, there better be a good
management plan in place,” Pantelaras says.
are closing costs on a home equity loan or HELOC, so you need to look at how
much it will cost overall to borrow against your equity.
paying a lot of money upfront to pay off the other debt, so it’s got to make
financial sense,” Pantelaras says.
4. Invest the money
homeowners use home equity to invest in the stock market or real estate,
expecting the returns to exceed the cost of the HELOC or line of credit.
risks, however, because there are no guarantees the stock market will perform
as well as expected.
you use home equity to invest in real estate, you can’t be certain the
investment property will be bring in more than what you put into it.
to sometimes overvalue a property they want to invest in or underestimate the
costs involved,” Sharga says. “It’s really abut financial management and
whether it makes sense to start with other investors or real estate
5. Take a fancy vacation, buy an expensive toy
and financial advisers agree that the worst reason to tap home equity is for
unnecessary personal expenses such as an extravagant vacation or a boat.
the things people got in trouble with during the housing market boom,” Sharga
says. “They used their house as an ATM.”
When it comes to your home equity, don’t borrow more than you need and don’t
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