Here's What Happens When You Use a Home Equity Loan for Something Other Than Home Improvements

When you have a need to borrow money, there are different options you can explore. One might be a personal loan, which allows you to borrow a lump sum for any purpose. And that could be a great option if you have a strong credit score.

Another option you may be inclined to look at is a home equity loan. Granted, this isn't an option if you rent a home and therefore don't have equity in one. But if you do own a home, you may find that you have plenty of equity to tap these days.

Home prices soared during the pandemic when the demand for U.S. properties increased, and that led to an uptick in home equity on a national level. In fact, as of the first quarter of 2023, the average U.S. homeowner with a mortgage had an impressive $274,070 worth of equity, according to data from CoreLogic.

If a home equity loan is an option for you, you may find that you're able to snag an even more competitive borrowing rate on one than with a personal loan. That's because personal loans are unsecured, whereas a home equity loan is secured by the home whose equity is being tapped.

But if you're going to sign a home equity loan, be sure to do so for a good reason. That's because you're taking a risk in signing one of these loans.

You can use a home equity loan for just about anything

One big misconception about home equity loans is that you can only use the proceeds to improve or repair your home. But just because this borrowing tool has the word "home" in it doesn't mean you can only use your loan proceeds for something related to your home. You can take out a home equity loan to fix your car, take a vacation, or start a business.

That said, when you sign a home equity loan, you effectively put your home on the line. That's because falling behind on home equity loan payments could put you at risk of losing your home. So if you're going to take out one of these loans, make sure it's to address a need or to do something that will vastly improve your quality of life on a long-term basis, like getting a certification that allows you to pursue a new career or finishing your basement to increase your usable living space.

You generally should not sign a home equity loan for something that gives you near-term gratification, like a vacation, but won't do a lot for you on a long-term basis. It's just not worth the risk of signing one of these loans, and it's not worth paying what could be a fair amount of interest.

Is a home equity loan the best way to finance home improvements?

You're not limited to using a home equity loan for home improvements. But if you have some to make, you may find that a home equity loan is your most cost-effective borrowing option.

Just remember that no matter your reason for taking out a home equity loan, it's a loan nonetheless. And you'll need to keep up with your payments. So before you commit to anything, run the numbers to make sure the monthly payments you're looking at are ones you can comfortably afford.