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Home Equity Loans: To Borrow or Not to Borrow?

Home Equity Loans: To Borrow or Not to Borrow?

The housing market is recovering nearly everywhere, which leads many homeowners to ask the question, “Should I consider cashing in on my home’s equity?”

Experts advise anyone considering a home equity line of credit to be cautious and to try to use that equity for purchases that will only appreciate – not depreciate - in value. They also advise borrowers to make purchases on assets they intend to be using 10 years down the road, when they are either still paying or have just paid off their home equity loan.

Something else to consider when thinking about a home equity loan, is just how long you plan to be in your home. If you take out a home equity line of credit and you decide to sell your home, your outstanding loan balance will be due once you close.

Some researches advise against borrowing against your home equity altogether, for the sole reason that it can make you more vulnerable to foreclosure. Undoubtedly, as your total mortgage rises, so will your payments. Plus, in a bad economy, falling home prices will mean you have less equity to lose. Further, once you borrow against your home, you will have less reserve funds in the future.

While those reasons may make using your home equity sound like a bad idea, you can actually use your home equity to increase your overall wealth. Here are some great reasons to take out a home equity loan:

  • To finance higher education
  • To start a business
  • To buy, renovate and lease rental properties
  • To repair or remodel your home with valuable upgrades
  • To use for medical bills or other emergencies

In addition to those certain assets, there are some not-as-great reasons that people decide to use their home equity line of credit:

  • To buy clothes
  • To buy new cars
  • To buy big-ticket electronics
  • To dine out
  • To take vacations

Some homeowners who decide to take out a home equity line of credit do so to pay off credit card debts. Experts argue over the pros and cons of doing this as well. While consolidating all debts into a home equity loan may give you one, lesser payment, it should not be used as a “quick fix” for a credit card habit.

To deter borrowers from making hasty decisions with their home equity line of credit, some lenders actually set minimum purchase amounts on the credit line. Others include a clause that requires their approval on smaller purchases.

Of course, when you take out a home equity line of credit, your home is held as collateral against the loan until it is paid off. So, perhaps a good question to ask is, “What would it take for you to lay your home on the line?”

Read more about the pros and cons of using your home equity: