The most valuable asset for many homeowners is the equity they’ve built up in their home over years of mortgage payments. Tapping into that equity could help you cover important expenses. But before you leverage the value of your home—whether it’s through a home equity loan, a home equity line of credit (HELOC) or cash-out refinancing—you should consider whether the plans you have in mind are worth risking your nest egg.
3 common home equity mistakes
When to think twice
Here are 3 times when you’ll want to think twice before borrowing against the value of your home.
Big ticket items
While it may be tempting to tap into your home equity to buy something expensive, such as a car or vacation, doing so could put your property at risk with little to no potential return on the investment. This kind of risk also could indicate that you might be spending beyond your means. Instead, develop a long-term savings plan.
Tapping your home’s value to fund a potentially lucrative-but-volatile investment like stocks or real estate is a risky bet. Sure, there’s upside, but if the market drops or real estate prices go down, you’ve essentially lost that equity in your home.
Launching a business
Starting in a garage doesn’t mean risking your garage. If you’re looking for startup capital, you’re better off getting a business loan than using home equity. That way, if your business fails, you won’t lose your home.
When you’re good to go
Of course, there are plenty of other occasions where a home equity line of credit isn’t just appropriate—it’s a smart move.
Improving your home
If you’re looking to use renovation projects to increase the value of your home, tapping into home equity can be a sensible way to reinvest in your property.
One loan, one rate. Home equity-related loans often have a lower interest rate compared to credit cards and some other loans, along with a fixed monthly payment. That means they can help consolidate existing debt into one payment as long as you're sure you are able to pay off the loan tied to your home.
Everyone needs an umbrella sometimes. Tapping home equity can be a good way to handle unexpected costs like medical bills, particularly if you’ve used up your emergency fund and can afford the monthly payments.
Hitting the books
Advancing your education can enhance your earning potential, which means the right schooling could be well worth the investment.
Either way: Think about it. The equity you have in your home is hard-earned and leveraging it deserves careful consideration. Take the time to research your options before making a decision.