5 good reasons to use the value of your home

Lenders want you to borrow again against the value of the house. The question is, should you?

Rising property values ​​and a sluggish mortgage market mean banks are re-marketing their home equity lines of credit. Last year, lenders provided HELOC $ 156 billion, an increase of 24% from the previous year, and a 138% increase from 2010.

HELOCs are generally a source of cheap credit with average interest rates below 5%. (How to Choose the Right HELOC Lender.) However, taking out a home loan can be risky. Interest rates are generally variable and payments may increase after the initial interest period. A recent increase in arrears on secondary mortgages, according to Black Knight Financial Services, is due to an 87% increase in late payments on loans in 2005, which just ended its mortgages at 10% interest rates. years.

Less equity also means less depreciation when your home’s value drops, making you more vulnerable to foreclosures if you lose your job or can’t pay off the loan.

There are times when taking risks can make sense, but only with certain restrictions. You generally don’t want to borrow more than 80% of your home’s current value, a ratio that includes your first mortgage. In general, you get better prices and terms, as well as an emergency mattress.

Everything you spend money on matters too. Here are five uses of home equity that may make sense:

1. Home improvement

But only if they really offer added value and you pay up to half the cost in cash.

Few renovations increase the value of your home as much as the costs can be covered. Many projects raise between 50 and 80 cents of dollars, assuming it sells out within a year of project completion.

If you only borrow half the cost of a renovation and pay the rest in cash, you can reduce the need for additional expenses. It also lowers your chances of paying interest on borrowed money for years, which will not increase the value of your home.

Speaking of years, a HELOC is probably the best option if you can afford it in a few years. If repayment would take five years or more, you should consider other options, such as B. Setting a fixed interest rate on a home loan.

2. Debt consolidation

But only if you are extremely responsible and can quickly pay the remaining amount.

There are many, many issues with using home equity to pay off credit cards and other high-interest debt. One of the most important is that you are converting consumer debt that could go bankrupt into secured debt that you cannot.

Another reason is that you might be hiding an issue that owes you more. If you don’t fix the budget issues that led to your credit card bills, you’ll soon have a HELOC balance and more credit card bills.

If you have your customs fixed and can pay HELOC quickly, say, in three years or less, it may be worth it. However, if it took you five years or more, you might be in too much debt for a DIY solution. Consider other alternatives eg. For example, a conversation with a credit counselor or a discussion of your situation with a bankruptcy lawyer.

3. Emergency costs.

But only if it is a real emergency and you have exhausted your savings due to a lack of retirement.

Financial planners generally recommend an emergency fund that spends at least three months. Unfortunately, it can take two years for a typical family to save that much, and in the meantime, things can turn sour. A HELOC can supplement an inadequate emergency fund and be a heartwarming Plan B as you build or rebuild your cash reserve.

4. College costs

But only if you are the parent and can pay off the balance before you retire while saving for retirement.

Students have access to federal student loans with low fixed interest rates, many payment options, and the ability to forgive. Parent PLUS loans, on the other hand, are associated with higher interest rates, housing costs over 4%, fewer payment options, and no hope of forgiveness.