Accessing home equity for home improvement, education, and debt consolidation may make financial sense when compared to the cost of other borrowing options.
Understanding Home Equity Loans
- Your home equity is determined by your home's current value: Home equity is the difference between your home's current value and the amounts of any mortgages held against it. Mortgage lenders require a cushion of home equity, so don't plan on borrowing every last dollar from your equity.
- Home equity can be converted to cash using either a home equity loan or line of credit (HELOC): A home equity loan is made for a specific amount and is repaid over a specified time with scheduled payments. A HELOC lets you borrow as needed up to your credit limit. Home equity loans and lines of credit cost less than refinancing your mortgage for additional cash.
- Avoid tapping home equity for frivolous expenditures: Buying a new boat or tropical vacation using a home equity loan may save money over financing such expenses with other kinds of credit, but using home equity for extravagant purchases can cause problems if your home value or income falls.
- Used wisely, home equity is a financial asset: You can use home equity loans and lines of credit for funding home improvement projects, paying off high cost credit card debt, or going back to school.
- Home equity lenders can foreclose: Failing to make payments can lead to foreclosure.
- Not borrowing at all can be a good decision: If you have concerns about borrowing against your home equity, it's better to wait than potentially putting your home and financial security at risk.
When considering home equity financing, please consult with a financial advisor or accountant to discuss your best options according to your circumstances.