Know Why You’re Using Your Equity

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Home equity is simply the difference between what you owe on your house and what it’s worth. You build equity by paying down your mortgage, from home appreciation or a combination of the two. Using your equity can be a wonderful benefit of home ownership, but it can also be a dangerous way to get cash. Before tapping into your equity, figure out if it’s a smart move. We’ll describe the common reasons for using home equity and help you determine if you should tap into yours.

Home improvements Debt consolidation Big expenses

This can be an excellent reason for using your equity. By putting the money back into your home you won’t eat up much equity because you’re increasing the value of the home. Not to mention you get the added benefit of living in an improved home.

Risks

Estimating how much it will cost to make your home improvements can be difficult. Ask most people who have remodeled a kitchen or bathroom and they’ll tell you that there’s always an expense that comes up that wasn’t budgeted for. When using your equity for home improvements, make sure you know how much you can afford to spend and stick to that estimate. The more you borrow, the higher your monthly payments will be.

This can be another good reason for using your equity. If you have enough high-interest debt, it makes sense to convert that debt into a lower-interest loan. Often credit-card debt and auto loans charge much higher interest rates than you can get when borrowing against your equity.

Risks

If you default on unsecured loans like credit cards, you might have no choice but to declare bankruptcy. If you use your equity to secure these debts, defaulting can cost you your home. Make sure you’re able to manage your monthly mortgage payments when adding additional debt onto them.

These can be anything that causes you to need money that’s not budgeted for. Maybe you want to buy a car or pay for college tuition. These are exciting events – but expensive. Using your equity can enable you to find the extra money needed to pay for expenses like these.

Risks

Make sure you can afford the additional monthly costs associated with the additional debt. Even though you may be paying this debt off at a relatively low rate, you’re using your home as collateral so be certain you can live with the payments.

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