Home equity can come in extremely handy for keeping you financially afloat during retirement or long-term illness. However, it should not be regarded as an ATM to be emptied whenever you feel like it.
According to the Associated Press, American homeowners are sitting on approximately $6 trillion of home value. Lenders are more than happy to access that capitol through home equity loans, home equity lines of credit or cash-out refinancing. However, homeowners need to be careful about such arrangements.
Treat it like a last resort
Despite the fact that rates may be lower and interest could still be tax deductible, putting that equity at risk means potentially losing your house if you cannot pay back the loan. Good financial planners will frown on using the equity for paying credit card debt, investing or buying luxury items, such as a new car. One only need look at the 2008 financial crisis for proof of what happens when homeowners recklessly accrue home equity debt where lenders would give up to 100 percent of home value.
Three issues to consider
While we have spoken in general terms, here are some additional thoughts to consider:
- It is your backup: It is becoming more common for Americans 62 and older to use it once they stop working, so that equity also works as an IRA.
- Do not spend the money frivolously: It is extremely tempting to see that equity and indulge in something fun. Fun is great, but try and set sensible limits on spending that money and then stick to them.
- What is the risk: Similar to the above, if you want to put that equity towards something, avoid high-risk/high-reward endeavors you cannot afford to lose. Conversely, it is smart to put money back into the home by getting a new kitchen or adding value to the home in some way you will likely see a major return.
Real estate is one of your biggest investments
The biggest investment for most homeowners is their home. It is always wise to speak with financial advisors and attorneys if you are considering new financial agreements involving your property. Legal guidance in particular can help you understand the terms and whether they are desirable.