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Is it responsible to borrow against home equity?

Posted by  on Nov 07, 2012
 

Q: My wife and I are getting older, and we have a lot of equity in our home. I'm tempted to tap into that equity, but I'm mindful that over-borrowing has led to foreclosure for a lot of homeowners. I guess what I'm asking for is some advice on how to use home equity responsibly.

A: Mortgage rates are certainly a cheaper way to borrow than using credit cards or personal loans. However, you don't want to give up home equity for just any old purpose. Here are some things to think about to help you use home equity responsibly:

  • Will you acquire something that will last longer than the loan term? A good rule of thumb is never take out a loan that will take longer to pay back than the useful life of what you are buying with the loan.
  • How does this fit into your retirement plan? You need to plan it so you can pay back the loan before you retire, unless you are confident that you will have so much retirement income you will easily be able to continue making those loan payments. Don't count on being able to sell the house to pay back the loan -- recent years have shown how uncertain the real estate market is.
  • How secure is your income? Between now and retirement, are you confident that there are no threats to your income that would put you in danger of default?
  • Can this be done in conjunction with refinancing? If refinance rates have dropped enough since your current mortgage, a winning formula could be to pull some equity out without drastically increasing your monthly payments or the remaining length of your loan.

As you say, too many people have gotten themselves into trouble by treating equity in their homes like an ATM. The fact that you recognize that there is a right way and a wrong way to use home equity is a good start toward using it responsibly.



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