Know Why You’re Using Your Equity
See if you can save money by consolidating your debts.
Home equity is simply the difference between what you owe on your
house and what it’s worth. You build equity by paying down your mortgage,
from home appreciation or a combination of the two. Using your equity can be a wonderful
benefit of home ownership, but it can also be a dangerous way to get cash. Before tapping
into your equity, figure out if it’s a smart move. We’ll describe the common
reasons for using home equity and help you determine if you should tap into yours.
| Home improvements |
Debt consolidation |
Big expenses |
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This can be an excellent reason for using your equity. By
putting the money back into your home you won’t eat up much equity because
you’re increasing the value of the home. Not to mention you get the
added benefit of living in an improved home.
Risks
Estimating how much it will cost to make your home improvements can be difficult.
Ask most people who have remodeled a kitchen or bathroom and they’ll tell
you that there’s always an expense that comes up that wasn’t budgeted for.
When using your equity for home improvements, make sure you know how much you can
afford to spend and stick to that estimate. The more you borrow, the higher your
monthly payments will be.
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This can be another good reason for using your equity. If you
have enough high-interest debt, it makes sense to convert that debt into a
lower-interest loan. Often credit-card debt and auto loans charge much higher
interest rates than you can get when borrowing against your equity.
Risks
If you default on unsecured loans like credit cards, you might have no choice
but to declare bankruptcy. If you use your equity to secure these debts, defaulting
can cost you your home. Make sure you’re able to manage your monthly mortgage
payments when adding additional debt onto them.
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These can be anything that causes you to need money that’s
not budgeted for. Maybe you want to buy a car or pay for college tuition. These are
exciting events – but expensive. Using your equity can enable you to find the
extra money needed to pay for expenses like these.
Risks
Make sure you can afford the additional monthly costs associated with the
additional debt. Even though you may be paying this debt off at a relatively low
rate, you’re using your home as collateral so be certain you can live with
the payments.
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