There are smart ways to use your mortgage home equity, and there are foolish ways. While it’s tempting to view the money you have already put down against the principal of your house as a savings account, be aware that if you fail to budget effectively and over draw your mortgage home equity, you could lose your house, wind up in credit trouble, or even have to file for bankruptcy.
Wise Ways to Use Your Mortgage Home Equity
Generally, it may be a wise idea to tap into your mortgage home equity if you can use that money to create additional capital. For example, if you have to pay seven percent interest on a home equity loan to use your mortgage’s equity, you should only take out that equity if you believe you can earn over seven percent with the cash once you have it in hand.
Depending on your specific situation, it may be advisable to:
- Take a low interest loan against your equity to generate the capital necessary to start your own business. Just be sure that you have a sound business plan in mind and that you have other safety cushions in place. For instance, you should have a reliable first income stream, such as a day job, and/or plenty of savings to protect you against cash problems and give you the mobility you need to get your business off the ground.
- Finance your child’s education or develop a retirement portfolio using some of your mortgage home equity. However, make sure you have a sound investment plan and don’t risk your home equity on speculative investments.
- Dip into your equity to generate funds for home improvement. Home improvement project can be a double win for you. Not only can you enjoy better, more comfortable living, but you can also improve the resale value of your home. Remember that not all home improvement projects will contribute equally to your home’s resale value. A redone basement, for instance, is generally not as valuable to buyers as a modernized kitchen. If you go the extra mile to install eco-friendly windows and heating and cooling units in your house, you may qualify for certain deductions.
- You can also use your equity money to consolidate your credit debt and sock away cash for emergencies. By paying off creditors, you can improve your FICO score and potentially qualify for a lower refinancing rate. To make the most out of this process, know your interest rates — for both savings and debts — and have your accountant help you with the calculations. With so many rate variables in play, it’s easy to get confused about how to consolidate, how to pick the right term for your home equity loan, and how much to allocate to savings and how much to allocate to payments.
Deciding Whether to Use Your Mortgage Home Equity
Make the decision carefully before taking a mortgage to use your mortgage home equity. It’s generally unwise to borrow against your home to support a lifestyle you cannot afford, or to take vacations or pay off credit card debt unless you have your spending under control. Remember, when you tap into your mortgage home equity, you are increasing the amount you owe on your house and delaying the length of time it will take you to own your house in full. If property values fall or your income situation changes, you may be unable to refinance or sell your home if you don’t have sufficient equity in it. Therefore, while there are smart ways to use your home equity, you need to ensure that the decision is the best decision for your circumstances.
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