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Home equity loans: When is it a good idea to tap your equity?

[Nov 27, 2010.]

 

There are good reasons and bad reasons to use home equity loans to access stored cash in a piece of real property. A good rule of thumb to use, anytime you are looking to leverage, is this: Will this transaction make money or save money? Outside of a life or death emergency, ask yourself this question before making the decision to leverage you home.

Examples of how home equity loans can make you money:


  • Grow your wealth by starting a new business. First of all, be wise. Don't spend money on a risky venture. Don't quit your day job...so to speak. If you have been presented with an opportunity that is low-risk and has the potential of increasing your income, a home loan may provide necessary start-up capital.

  • Annuities, or other safe investments, that guarantee higher returns than the total cost of the home loan, may be a sensible way to use the equity in your home. Get any agreement in writing, first, and have the terms double checked by a trusted financial advisor, if possible.


Other good reasons to use home equity loans:

  • Home improvements, which give you as close to dollar for dollar for your efforts, should make sense. Exchanging your stored equity for the value of an improvement usually makes good financial sense. Things like: a new roof or heating system, adding a bedroom and increasing square footage, or up-graded plumbing or electrical, may offer you dollar for dollar what you spend as those things can increase the value of your home.

  • Debt consolidation and paying off credit cards is only a good idea if you don't go right back into debt. During the housing boom of the early 2000's, people would rack up credit cards, use their increasing home equity to pay the balances, and then go out to run up the balances again. This cycle of spend and refinance got a lot of people into trouble. Only use your home's equity to pay debts if your budget is balanced and your spending habits are under control.


Never use your valuable home equity for this:

  • Don't gamble on a risky investment. Your home, is literally the roof over your head. It is where you, and maybe your children, sleep at night. Rolling the dice on a risky business venture or investment does not make good financial sense.

  • Spending the money is a bad idea. Don't suck the equity out of your home to go on a vacation or go shopping. Even buying a depreciating asset, such as a boat, makes little financial sense.

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.

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