Higher interest rates and lower home values are reasons cited for not tapping home equity. In some cases, that concern is warranted: If your home value drops, you could owe your home equity lender more money than your house is worth. And if you run into tough times and can't pay back the loan, you could lose your home.
Similarly, it may not be wise to use home equity to consolidate or pay off large credit card bills. Although card rates are about five percentage points on average above a home-equity loan, the lower monthly payment by tapping home equity still might not make sense if it takes longer to repay the new loan, resulting in higher interest charges over the long term. Worse, you might run up new charges on those cards in the meantime.
It makes sense to take out a home equity loan in today's volatile housing market if:
- You've lived in your home long enough to build up significant equity.
- You don't plan on moving soon and can weather a downturn in the housing market.
- You have a stable job.
- You're facing an unavoidable expense but don't have cash to cover it.
Bottom line: Review your budget and understand the difference between luxury and necessity expenses. Tapping home equity for big-ticket purchases like a car may not make sense right now, but using the money to finance household repairs and additions might increase your property's value.
For more information, read "Lenders, Counselors Help Homeowners Avoid Foreclosure" in Home & Family Finance Resource Center.
courtesy of cuna.org