By John Voket
With interest rates still hovering at historic lows and the economy and job picture improving across the nation, many property owners are eyeing home equity loans to underwrite a variety of products and purchases. So we’re tapping the folks at Take Charge America, a nonprofit financial planning and resource site (takechargeamerica.org) for some common-sense, home equity dos and don’ts:
DON’T use home equity to purchase unnecessary luxuries.
DO use home equity for improvements or additions that add value to your 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.
DO consider home equity to cover expenses from unexpected events. If you do not have emergency savings, your home equity can provide financial relief related to unexpected events, such as an injury preventing you from working.
DON’T take out excessive equity. Since 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 home equity 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, which basically means 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.