The equity you've built in your home is a valuable resource. You can use it as a tool to build your wealth, or you can spend it unwisely. Ultimately, it's your choice, but here are four things most experts recommend you do not do with your home equity.
1. Do not use it to consolidate debt.
If you've racked up debt on your credit cards, you should sit down with a professional and make a plan to pay it off as efficiently and steadily as possible. A home equity loan might allow you to pay off a large chunk at once, but you'll only be transferring debt from one vehicle to another, and putting your home up as collateral as a result. Instead, commit to paying down your balances as well as putting a stop to spending more than you earn.
2. Do not use it to invest.
Unless you are certain that the ROI (rate of return) on your investment will outpace the cost of your home equity loan, you should not use home equity for investments. However, one exception would be using the funds to start or grow your own business. If you're not certain of the ROI on a potential investment, consult your financial planner or investment professional.
3. Do not use it to make improvements that vastly over-value your home.
More than one person, in the last couple of years, borrowed tens of thousands of dollars of their home equity to finish their basement, along with a tricked out, high-tech home theater system. Someone else is now enjoying that beautiful basement theater at a fraction of the cost because the home owner's improvements completely outpaced the neighborhood home values. If you're going to make improvements with your home equity loan, talk to your Realtor about the projects which will offer you the best return on your dollar as well as the current value of homes comparable to yours in your neighborhood.
4. Do not use it as income if you are over the age of 62.
If you need help with supplemental income and you are over the age of 62, it may be better for you to consider a Reverse Mortgage. With a Reverse Mortgage, you are borrowing against the equity in your home, but you don’t have to repay the loan until you move out of the home or your heirs inherit it. Proceeds from the sale go towards paying the lender back and any remaining funds go to either you or your heirs.
Don’t hesitate to discuss your home equity loan plans and options with your mortgage professional and real estate agent. They can advise you not only on the details of a home equity loan, but other options that may be better suited for your financial situation as well.