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Welcome To The Insighter!

Explore the latest happenings at Kirtland CU and learn about important topics from around the financial world. Here’s your insight! To learn about retirements, investments and financial planning, check out Invested now.

When Does Using Home Equity Make Sense For You?

By K-Staff

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Home equity loans and lines of credit allow homeowners to borrow money at a lower interest rate than other lending options – however, using home equity doesn’t always make sense. When does it make sense, and when should you consider other options?

Considerations When Using Home Equity

There are potential drawbacks to using a home equity loan, foremost among them being that you are staking your property on securing the loan. If you can’t afford additional payments on top of your original mortgage and default on your home equity loan, you could lose your home.

Borrowing against your home equity also reduces the total equity you have in your home – investing back in your home will generally increase your home’s value, but if this doesn’t happen, you may owe more than your home is worth, leaving you with negative equity.

Finally, in order to acquire a home equity loan, closing costs must be paid which can amount to 3-6% of the total loan amount – so you will need to account for these additional costs when determining your preferred borrowing option.

Using Home Equity Responsibly

If you are considering using your home’s equity, you should ask yourself these questions:

  • Why am I borrowing this money? Will it improve your financial situation? Will it add value to your property or other holdings?
  • Can I comfortably repay this loan? Do you have a consistent monthly income, and is the monthly payment affordable?
  • Is this the ideal option for my situation? Can you obtain the funds you are seeking in a more affordable or less risky manner elsewhere, such as an emergency fund or savings account?


Taking time to review your options can help you make a responsible decision about tapping in to your home equity.

Alternatives to Using Home Equity

There are other means to borrow money that don’t involve use of your home’s equity:

  • Personal loans: A personal loan lets you borrow without using your home as collateral, but because it is unsecured, interest rates will be higher, going into double digits. For smaller amounts and shorter repayment periods, though, they are an accessible option for your borrowing needs.
  • Credit cards: Credit cards offer quick access to funds with even higher interest rates than personal loans. However, if you can pay them off quickly, they make sense for low-cost short-term needs. Credit cards are not generally advised for use for larger home equity financing needs.

We're Here to Help

If you’re still trying to determine whether a home equity loan or line of credit is right for you, we’re here to talk you through the process – there’s no obligation to apply, and we can help you make the right choice to best realize your goals.

Sources:

https://www.agfed.org/blogs/moneydig/when-does-a-home-equity-loan-make-financial-sense/

https://www.rocketmortgage.com/learn/is-a-home-equity-loan-a-good-idea

https://www.nerdwallet.com/mortgages/learn/home-equity-explained-matters

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