When to Use the Equity in Your Home

    MC900185740With home values rising all over the country, tapping into that equity that most of us are building once again can be incredibly tempting! When used wisely, home equity can help send your kids to college or launch a business. However, there’s always risk to using home equity loans as they can often make you more susceptible to foreclosure.

    A recent study by the Federal Reserve found 30% of  Los Angeles homeowners who lost their homes during the foreclosures crisis wouldn’t have defaulted had they not cashed out their home equity. Researchers said that borrowing against your home’s equity may cause problems for a few reasons:

    • Your payments will go up as your total mortgage gets bigger
    • If home prices fall, you have less equity to lose.
    • If you fall upon financial hard times, your financial cushion is thinner.
    • If you end up having to look into a short sale, home equity lines of credit are a nightmare!

    Despite the Federal Reserve study, home equity can be a smart tool when you want to build wealth. Home equity lines can be used to buy and renovate rental properties. When the value of a rental property rises, you can refinance, pull cash out, and buy another rental property. Unfortunately, some folks don’t use their equity as wisely. Oftentimes home equity lines of credit are used to pay off credit card bills, buy vehicles or ‘toys’. In general, if the asset you’re purchasing with your asset is going to depreciate – don’t do it! Things like clothes, vehicles, bills, food, vacations all depreciate or lose value over time. Use your equity to purchase appreciating assets or things that will eventually lead to more money for you like buying real estate, training or education, home improvements, starting or buying a business.

    To find out if you have equity in your home, contact me for a free market evaluation and referral to a local lender who can help you draw on that equity you’ve built. I can even help you determine which home improvements will give you the biggest bang for your buck!

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