Skip to Content

Equity is the difference between a home’s fair market value and the outstanding mortgage balance. When the housing market crashed in the fall of 2007 and into 2008, many homeowners across the nation lost much, if not all, of the equity in their homes.

Homeowners who do have equity in their homes have the option to borrow money against the equity they have built up with a loan or line of credit. In both cases, the house serves as collateral, which means the creditor may seize the home and sell it if the homeowner can no longer make the payments. Tapping into your home equity can be detrimental if you enter into the contract without fully understanding the repercussions.

While risky, there are some instances when a home equity loan makes good financial sense. To help you sort out the confusion, we’ve provided some common home equity do’s and don’ts:

DON’T use home equity to purchase unnecessary luxuries.     dos and don'ts for using home equity

Consumers shouldn’t use home equity for luxury items like a fancy car, boat, big screen TV or a vacation. The fleeting moments of joy aren’t worth putting your family’s security at risk.

DO use home equity for improvements or additions that add value to your home.

Ideally, it is an asset and should be used for other assets. A home equity loan can be effective if it’s used for home improvements that maintain or increase the resale value of the home. It may also be appropriate to use home equity to purchase income-producing property or an investment that’s expected to generate a higher return than the cost of the loan.

DON’T tap home equity if you plan to sell in the near future.

In order to sell your home, you need to pay off all debts related to your home. It could be a poor move to tap  equity for improvements if you aren’t able to pay off the loan or line of credit prior to your desired sell date.

DO consider using it to cover expenses from unexpected events.

If you do not have emergency savings, the equity in your home can provide financial relief related to unexpected events, such as an injury preventing you from working. However, it’s ideal to have an emergency fund with at least three to six months of living expense. If you don’t have an emergency fund, we suggest you start making regular contributions now. Many consumers start with a $25 contribution each month, and then increase their contributions as their income allows it.

DON’T take out excessive equity.

If you decide to use your home equity, don’t take out more money than absolutely necessary. This will help eliminate the temptation to spend the funds on unnecessary luxuries. Also keep in mind that a home equity loan or line of credit decreases the amount of equity you have in your home. If you have taken out too much equity and the real estate market drops, you can end up losing all the equity in your home. Further, if you have negative equity, the lender may demand immediate payment of the loan.

DO consider tapping into it for use in retirement.

Retired homeowners who have paid off their mortgage can sell their home and cash out the equity by downsizing. Further, homeowners 62 and older have the option of reverse mortgages; the bank will give your equity back to you while you’re still living in it. The homeowner does not need to repay the mortgage for as long as he/she lives in that house. Learn more about reverse mortgages here.

woman working on balancing budget

Struggling with Credit Card Debt?

A debt management plan can help:
  • Consolidate monthly payments
  • Lower interest rates
  • Eliminate collection calls

Related Posts

What Are Credit Card Hardship Programs?

Struggling with credit card debt is frustrating enough. But when you add in a stressful life event such as job loss, serious illness or a natural disaster, trying to pay those bills every month can become overwhelming. That’s where a credit card hardship plan may be able to help. Sometimes called assistance programs or hardship […]

Read More

Closing Costs: What You Need to Know

If you’re buying your first home — or it’s been awhile since your last real estate transaction — you might need a refresher on what closings costs are and how they work. Saving for a down payment is often discussed when purchasing a home, while closing costs can get overlooked; but they are an equally […]

Read More

Stay Away from these High-Interest Loans

Consumer with no credit or poor credit have few options available when they need to borrow money. Certain types of lenders step in to fill this void with high-interest loans that can seem manageable at first, but quickly spiral out of control as the reality of sky-high interest rates create balances that are difficult — […]

Read More

Call 866-528-0588

Or schedule a call now
Please complete the required fields to continue.
Now Later
By requesting a review you are agreeing to communications from Take Charge America via email, phone and SMS messaging. You can opt out at any time.