The Good and Bad of Tapping Into Your Home Equity

Purchasing a home is much like investing money into a bank account. Overtime, your monthly mortgage payments will build equity and you may be able to pull out this invested money down the line.

If you’ve been lucky enough to purchase a home recently, the value may have already started to appreciate. According to CoreLogic’s latest housing report, “91,000 homeowners regained equity in the first quarter of 2017.” This has been the largest increase seen since 2014.

However, you will want to be fully knowledgeable about your home equity before tapping into it. If you’re curious about the potential of your equity, it’s time to reconnect with your lender and go over potential options you have.

If you are still dead set on pulling out those funds, here are the pros and cons of taking action:

Renovations

One of the most popular ways to use home equity is for a desired home renovation. The idea is that the money you put towards the renovation will raise the value of your home, if and when you are planning on putting it on the market. Or, it could be for personal functionality. However, before making this decision it’s important to know which renovation will give you the most bang for your buck. Check out some online sources based on ROI per project. You may be surprised at which renovation will be a good investment versus a financial bust.

Purchasing a new car

While you do enjoy your reliable 2004 Toyota Corolla, a brand new 2017 Jeep Cherokee would look much better, right?

Buying a new car is always exciting, but is it feasible to use your home equity towards this purchase? Before you answer, ask yourself, is this something you can purchase without tapping into your home equity? If the answer is yes than save those equity funds for another, more important matter. You will thank yourself later in an emergency.

Home addition

If you have a large family or your in-laws are frequent visitors, adding onto your home may be a good option. Once again, checking online sources to see a cost vs. value calculator is a useful tool. There may be some things you are surprised to learn about which home additions will give you the best ROI. That said, if making an addition will be the best option for your family but doesn’t have the highest ROI, don’t ignore it. It is better to put your family first rather than prepping a home that you don’t intend on selling in the near future.

Personal luxuries

It’s never a bad idea to take your family on a vacation, especially if you have some of that home equity cash ready to go. But, using this money for expenses such as a luxurious vacation may come back to bite you. A mistake commonly made by homeowners is using their home equity like a credit card. Your home equity money should not be used to live above your means but for “emergencies”. The risk that comes with using home equity as a credit card is more than just a poor credit score, but you are putting your home on the line.

Investment properties

Acquiring more real estate can be a sticky situation. Before deciding to buy that second home, weigh your options. Much like anything, tapping into home equity for a second mortgage has pros and cons. A pro would be your lender may be more favorable to the homeowner that has used equity for a second home because they show more experience. A con would be if they see you’ve taken out a second mortgage you are more likely to stop payments on the first home if you run into financial difficulty. To create a safety net, your lender may charge a higher interest rate or require a larger down payment.

College

College is expensive and the cost doesn’t seem to be letting up anytime soon. To offset the pricey cost of education, homeowners have been looking to tap into their home equity. The benefits of a home equity loan are that they may be cheaper than other loans and interest paid is tax-deductible. The downside is that loan terms are not flexible, which could create chaos if you happen to face a financial hardship.

Bottom Line

Your home equity can be used for whatever your heart desires, but knowing when to take that risk will be the difference between losing value in your home and having a cushion for emergencies.