Things you should never use your home equity loan for

A home equity loan can be an easy way to access cash at a lower cost, but it comes at a high cost. Borrowing against your home equity puts your home at risk and prevents you from building long-term wealth. Just like with a home equity line of credit (HELOC), taking out a home equity loan is generally not recommended for anything that will not directly increase the value of your home. These are the main things you should never use your home equity loan for.

Key points to remember

  • A home equity loan risks your home and erodes your equity.
  • Don’t take out a home equity loan to consolidate debt without addressing the behavior that created the debt.
  • Don’t use the equity in your home to fund a lifestyle that your income can’t afford.
  • Don’t take out a home equity loan to pay for your education or buy a car.
  • Don’t take out a home equity loan to invest.

Paying off debt without a plan in place

Home equity loans have much cheaper interest rates than other forms of unsecured debt like credit cards because they use the equity in your home as collateral. It can be very tempting to consolidate a large balance of high-interest debt into a lower-interest home loan.

Second mortgage

“Remember that with a home equity loan, you are putting a second mortgage on your home. You should only do this when you have no choice or it makes good financial sense.”

—Kimberly Foss, Founder and President, Empyrion Wealth Management

Going into more debt to pay off existing debt can make good financial sense, but only if you have a good plan in place. If you don’t address the spending habits that got you into debt in the first place, or if you don’t actually use your home loan to pay off your debt, you’ll end up in a much worse situation overall. If left unpaid, credit card debt can reduce your credit, but an unpaid home equity loan will lead to foreclosure and possibly the loss of your home. Don’t risk it if you don’t have the discipline or ability to pay it.

Financing a lavish lifestyle

Using a home equity loan to finance a lifestyle that your regular income cannot support is very unwise. Going on a dream vacation, eating out at fine restaurants with your friends, or keeping up appearances in a thriving social circle all sound good, but you’re risking your home by using your home equity to buy them. If taking out a home equity loan is the only way to finance your dream wedding, you need to re-evaluate your dream and opt for something smaller, increase your income, or delay until you have the money saved for. do it.

pay for college

By taking out a home equity loan to pay for your college education, your own home may be paying for a degree that may never be completed or used. If you have college-aged kids, you’re probably in your last working years before retirement. In this case, taking on a large debt like a home equity loan can delay your own retirement. Investigate other college financing options before taking out a home equity loan.

To buy a car

You should never take out a home loan to buy a car. Auto loan interest rates are rising and higher than home equity loan rates, and an auto loan won’t erode your home equity or risk foreclosure if you can’t repay it.

Invest

The use of a home equity loan for investing should be avoided. “Property equity should never be used for speculative purposes, including the purchase of real estate, because if the market goes against you, you could lose the value you have accumulated in your home” , says Kimberly Foss, founder and president of Empyrion. Wealth management.

While some expert real estate investors and stock speculators have risen to fame over the past few years earning millions by leveraging their home equity, they are the exception, not the rule. Don’t risk your own home for an investment that could sink to zero and leave you without a roof over your head

What are the alternatives to a home equity loan?

The best alternatives to a home equity loan depend on the amount needed, the purpose, and how quickly you need the money. Budgeting and saving for a known expense is your best bet. If you don’t have this ability, a car loan, 0% APR credit card, personal loan, or student loan are all options that still carry risk but don’t use your home as collateral.

What is the best use of a home equity loan?

“For people considering a major renovation or renovation, and for some people who are retired or nearing retirement, access to greater home equity through a true home equity loan can be good strategy.” Foss says, but adds a note of caution. “You should carefully consider all of your other available resources, income, interest rate environment and other factors before committing to a home equity loan.”

Is it easier to get approved for a home equity loan or a HELOC?

A HELOC and a home equity loan have the same equity, credit score, and debt-to-income requirements. There is no evidence to suggest which type is easier to be approved for.

The essential

A home equity loan allows you to borrow a lump sum of money against the value of your home to use on whatever you want. Don’t risk your home or squander the hard-earned equity you’ve accumulated in it for anything other than something that will increase the value of your home.

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