July 2nd, 2018 8:08 AM by Jackie A. Graves, President
Home equity burning a hole in your pocket? You may want to think
twice about that boat.
is a valued resource, and if you have it, you might be tempted to tap that
wealth for other purposes. A home equity loan, which allows you to use your
home’s equity as collateral, is a great way to do this. But depending on your
personal situation, it may not be the right thing to do.
Here’s when a home equity loan makes sense — and when
homeowners yanked cash out of their homes to fund affluent lifestyles they
couldn’t really afford? These reckless borrowers, with their boats, fancy cars,
lavish vacations and other luxury items, paid the price when the housing bubble
burst. Property values plunged, and they lost their homes.
learned: Don’t squander your equity! Look at a home equity loan as an
investment — not as extra cash when making spending decisions.
use of home equity funds is for home improvements that will add to the
home’s value. If you have a one-time project (e.g., a new roof), then a home
equity loan might make sense.
If you need
money over time to fund ongoing home improvement projects, then a home equity
line of credit (HELOC) would make more sense. HELOCs let you pay as you go and
usually have a variable rate that’s tied to the prime rate, plus or minus some
This is a
no-brainer, but it’s always worth reiterating: Basic expenses like groceries,
clothing, utilities and phone bills should be a part of your household budget.
budget doesn’t cover these and you’re thinking of borrowing money to afford
them, it’s time to rework your budget and cut some of the excess.
multiple balances, including your high-interest credit card debts, will make
perfect sense when you run the numbers. Who doesn’t want to save potentially
thousands of dollars in interest?
consolidation will simplify your life, too, but beware: It only works if
you have discipline. If you don’t, you’ll likely run all your balances back up
again and end up in even worse shape.
If you have
college-age children, this may seem like a great use of home equity. However, the potential
consequences down the road could be significant. And risky.
tapping into your home equity may mean it takes longer to pay off the loan. It
also may delay your retirement or put you even deeper in debt. And as you get
older, it will likely be more difficult to earn the money to pay back the loan,
so don’t jeopardize your financial security.
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