Home equity often fluctuates in accordance with the economy, so if the economy is currently doing well then it’s safe to say that the market value of your home has the potential to rise. When this happens it can be tempting to tap into your home equity in order to fund another project. Borrowing from one asset, in this case your home, to fund something else isn’t always the best idea, but there are certain cases where it can be a smart choice.
If you are currently gainfully employed and believe that there’s little chance you could lose your job and are confident that you won’t have any trouble paying off the loan then a home equity loan could be a great option for you. A home equity loan or line of credit is a great tool for responsible borrowers and it can be more cost-effective than other options but, just like any other type of loan it comes with its own set of risks. A home equity loan has the potential to help you save on interest fees, can offer fewer monthly payments and often the loan amounts are higher than average. Just remember that that a home equity loan won’t automatically solve all your debt problems and could potentially create new problems as your putting your home at risk if you can’t afford to repay the loan.
This is why it’s important that you understand when a home equity loan is a good choice and when it’s a bad choice. A summer vacation or an expensive car are not reasons why you should take out a home equity loan, but here are three instances when a home equity loan is a great option.
When you update your home it adds value which means that it’s worth more in the real estate market. This is a great reason to tap into your home equity as you could potentially sell your home for a much higher price then you purchased it for, because you increased its value with updates and improvements. Based on the current equity of your house you could get a large loan and tackle finishing your basement or building an add-on. Or you could stick with a smaller loan and update the bathroom or add a few cosmetic improvements; whatever updates you choose a home equity loan is a great choice. Furthermore, if the value of your house has already recently risen then you’ll have the opportunity to borrow a larger sum of money as your home equity will be higher.
Paying off credit card debt or other types of personal debt is a very popular use for a home equity loan, and for good reason as most people believe that it will solve all their money problems and resurrect a healthy financial future for them. Even if you’ve crunched all the numbers and gone through all the potential issues in your head things can still go wrong. Excessive credit card debt is obviously not something most people want to deal with, but do you know what’s worse than having your credit card company constantly calling you? Having your house taken away from you because you couldn’t make the payments on your home equity loan that you used to pay off your credit card debt.
So when is tapping into your home equity to pay off your credit card debt (or other personal debt) a good idea? Well unfortunately it’s a case by case kind of situation and there isn’t a concrete answer. If you’re just starting your get out of debt plan and aren’t making a lot of money and don’t have a significant savings then taking out a home equity loan to pay off your credit card bill is not a good idea. But if you’re in the final stages of your debt repayment plan and want some extra cash to pay off a few small debts and you are absolutely sure you can make the payments on a new loan then by all means go for it.
If you’re currently looking to increase the amount of money you have for living while retired because your retirement savings and investments aren’t quite meeting your needs then a home equity loan could be a good option. However, if you’re trying to plan for your future retirement it’s not a good idea to include your home equity into your plan as heavily relying on that money could potentially backfire. Home equity fluctuates so you never know what might happen.
Tapping into your home equity, no matter how carefully you think it through, is always a risk. Make sure you keep that in mind before you decide to take out a home equity loan.
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Caitlin Wood is the Editor-in-Chief at Loans Canada and specializes in personal finance. She is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. Caitlin has covered various subjects such as debt, credit, and loans. Her work has been published on Zoocasa, GoDaddy, and deBanked. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security.
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