3 Smart Reasons to Borrow Against Your Home

Thinking of borrowing against your home? Here's why that could make a lot of sense.

At different points in life, you may come across a situation where you need to borrow money. Maybe you need a new car, you've gotten stuck with a string of costly medical bills, or you want to renovate and don't have the cash to pay for your home improvements up front.

You could go out and get a personal loan, or you could apply for a credit card with a healthy spending limit and charge your expenses. But here's why borrowing against your home makes more sense, whether you do so with a home equity loan, a home equity line of credit (HELOC), or a cash-out refinance.

1. It's relatively easy to qualify

Personal loans are unsecured, which means they're not tied to a specific asset. But when you borrow against your home, your home itself is used as collateral for your loan. That means that your credit score is less important in terms of qualifying because your lender has recourse if you fall behind on your payments. This doesn't mean you won't have a problem borrowing against your home if your credit is extremely low. But you may have an easier time qualifying for a HELOC or home equity loan with fair credit than qualifying for a personal loan.

2. It's generally affordable

The interest rate you'll pay on a home equity loan or HELOC is generally lower than what you'll pay on a personal loan, and it can be substantially lower than what you'll pay on a credit card. What's more, if you do a cash-out refinance, you might snag a really good deal given where today's refinance rates stand.

3. It won't hurt your credit -- provided you pay off your loan on schedule

When you charge expenses on a credit card and carry a balance that you pay off over time, you risk lowering your credit score in the process. One factor that goes into calculating that score is your credit utilization ratio, which measures the amount of available credit you're using at once. Even if you make your minimum payments each month, too high a credit card balance could still cause damage to your credit score. On the other hand, if you borrow against your home and make your loan payments on time and in full every month, it won't hurt your credit at all. In fact, installment loans could even help your credit improve.

What's the right call for you?

Borrowing against your home is not without risk. If you fall behind on your home equity loan, HELOC, or mortgage payments under a cash-out refinance, you could eventually risk losing your home to foreclosure. But if you're confident that you can keep up with your loan payments and don't take out a loan that's excessive, then borrowing against your home could help you get the money you need with a lower interest rate and easier time qualifying. And there's certainly something to be said for a less stressful borrowing experience.