Home Equity Is Up. Should You Tap Yours?
by Maurie Backman | Published on Aug. 27, 2021
Here's how to know if you should borrow against your home.
One of the best parts about being a homeowner is getting to build equity in the property you own. Equity refers to the portion of your home that you own outright. If your home has a market value of $300,000 (what it could sell for today) and you owe $200,000 on your mortgage, you're left with $100,000 in equity.
Having home equity isn't just something to be proud of. It's also something you can use to your financial advantage. That's because homeowners with equity generally get the option to borrow against it, whether via a home equity loan or a home equity line of credit (HELOC).
Because home values have soared on a national scale, a lot of property owners are now sitting on more home equity than they have in the past. In fact, in late 2020, home equity reached a record high of $7.3 million.
If you have a lot of home equity, you may be contemplating borrowing against it. But should you? Let's take a look at when you should and shouldn't borrow against your home.
When it pays to borrow against your home
The upside of borrowing against your home equity is that you may have an easier time qualifying for a home equity loan or HELOC than you would for another type of loan. The reason is that your home is used as collateral for that loan, and so if the equity is there, it's not such a huge risk for lenders.
Say you take out a $50,000 home equity loan on a property that you have $100,000 worth of equity in. If you don't pay that money back and your lender is forced to take possession of your home and sell it to satisfy that loan balance, that's something that should be easy enough for it to do given your home's value.
The other benefit of borrowing against your home is that you may pay a lot less interest on the amount you borrow than if you were to borrow another way, such as taking out a personal loan. As such, if you need money for an important purpose, borrowing against your home could make sense.
What counts as important? There's no single definition, but generally, you'll want to reserve the option to borrow against your home for things like:
- Home improvements
- Home repairs
- Getting a new car
- Paying down costly credit card debt
- Paying for education
When you shouldn't borrow against your home
Any time you take out a home equity loan or draw from a HELOC, you're borrowing money, and you'll need to pay it back. If you don't, you could risk losing your home. As such, you should only take that risk under the right circumstances. And you shouldn't take that risk if you plan to use the money to take a vacation, engage in more leisure spending, or support a lifestyle your regular paychecks fall short in covering.
Generally speaking, those are all things you shouldn't borrow money for, whether via a home equity loan or another loan type. If you want to travel, for example, it's best to save up for a trip rather than rack up debt over it. And so you shouldn't be so quick to turn to your home as a cash source.
Remember, borrowing against your home equity is not a risk-free prospect, so if you're going to do it, make sure you have a good reason for it. And also, don't take on a higher loan than you can afford to pay off. The last thing you'll want to do is put at risk the home you've worked so hard to afford.
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