Using Home Equity: Your Guide To The Essential Dos And Don'ts

If you have paid off a substantial proportion of your total mortgage, the difference between your home’s market value and the outstanding balance of the mortgage is called home equity.

And homeowners can access this home equity in the form of a line of credit or loan. Sometimes this can be a considerable amount of money, that you could do a lot with.

But, you should be very careful before you do, because the house is considered to be collateral for the credit. And this is bad because if you struggle to make the payments owed on the line of credit, the creditor may seize the home, and even kick you out to sell it on to someone else for profit.

For this reason, accessing your home’s equity may be a good idea in some instances, or a bad idea in certain other circumstances.

The purpose of this article is to cover the most common home equity dos and don'ts that sensible people go by.

This can help you to gauge what would be good reasons or bad reasons to access your home equity.

And without further ado, let’s get started.

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Don’ts

Let’s kick things off with what to avoid. Following these don’ts can save you a lot of grief if things don’t end well.

1. DON’T use home equity to buy unnecessary luxury items

There are so many nice luxuries that accessing your home’s equity can help you buy. A brand-new vehicle, a MacBook, Apple Watch, smartwatch, the list goes on.

But you have to recognize that these are luxury items, and not one of them is actually worth putting your entire family’s financial security at risk

Your home is part of your family’s legacy, and the money from the sale of your home could help them long after you pass away.

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2. DON’T access your home equity if you’re thinking of selling the home anytime soon

If you’re thinking of selling your home, say within the next 5 years, then you don’t want to be tied down to it financially.

If you access your home equity, you will be expected to keep making payments until the creditor has been fully repaid with interest.

In most instances, that will take time, and could leave you stuck at that home for longer than you intended to. 

3. DON’T take out any more money than you really have to

If you decide it is worth using your home equity for one or two things, please ensure that you know the cost of these specific things before you apply for the credit. Then, request this amount from the creditor, and not a cent more.

Don’t say to yourself for example that you want to pay $2000 on home improvements, and then tag another $500 on for the sake of it.

The more money you take out, the harder it will be to pay back, and the longer it will take to pay back. Taking out home equity is a risky move, and it should not be done lightly.

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Do’s

But, there are instances where accessing your home equity can be a good idea. Here are a few Do’s for you.

1. DO use home equity to increase the value of your home by making improvements to it

You could easily use the cash from your home to make significant improvements to it, which can, in turn, increase the value of your home.

And the great thing is if your home equity is released to you at a fixed rate, then the amount of money you pay back to the creditor will be related to the original value of the home at the time of the contract, and not to its new and improved value.

2. DO use home equity for sensible investments

If, perhaps, you spot an investment opportunity that pays a better return on your investment than the monthly repayment for the home equity, then this is a profitable move to make. The tricky part is finding such an investment that you a) can afford, b) isn’t risky, and c) pays well enough.

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3. DO access the money if you absolutely need to

We always encourage visitors to our website to have emergency savings put by. You never really know when a big problem could strike.

We usually recommend that you save enough money to cover at least 3 months of living expenses at the bare minimum, or ideally at least 6 months' worth.

But sometimes people find that even if they do have emergency savings put by, this does not always cover the costs that they need to pay. Such as for a vital operation. In this instance, it may be worth accessing home equity if you are in a position to do so.

4. DO consider using home equity for a more comfortable retirement

Once the kids have grown up and left home, or even moved away, you don’t really need such a big home anymore.

Many people when they hit retirement decide to themselves that they’d like to live somewhere else, and would like to downsize to a smaller home so that they have more money for a more comfortable old age.

What’s more, homeowners over the age of 62 are eligible to apply for reverse mortgages. This is where the bank will return your home equity to you, while you remain living in it. And, you won’t have to repay the mortgage for as long as you remain resident there.

Also read: How To Apply For a PPP Loan 

Wrap Up

It was mentioned earlier, but it bears repeating here: using home equity is a risk - your home is put up as collateral, and if you fail to make repayments, the creditor could seize it.

For that reason, you should be very careful about using your home equity. But with these main dos and don'ts, you are now armed with the key things to consider before you apply to access your home equity.

The key is to think ahead, imagine multiple future scenarios, and prepare for each of them. 

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