Is a Home Equity Loan Right for Me?

It is certainly no secret that home prices have been rising substantially in recent years. This rise in the value of homes has left many existing homeowners suddenly flush with equity and potential cash they never thought they would have. As a result, there are a record number of home equity loans being written, and you may be wondering if such a loan is a good idea for you.

There are a number of things all potential home equity borrowers must ask themselves before taking the plunge and tapping the built up equity in the home. Perhaps the most important question to answer is why you need the money.

One of the most popular reasons to take out a home equity loan is to pay down high interest debt like credit cards. While it may seem like a good idea to replace high interest credit card loans with low interest home equity loan payments, it can be a dangerous strategy as well. When using the equity in your home to pay off credit cards, it is imperative for the homeowner to use fiscal discipline and restraint going forward.

That is because the last thing you want to end up with is a home equity loan payment coupled with a bunch of new credit card bills. In addition, while credit card loans are unsecured, the home equity loan is secured by the most valuable asset you own – your home. Putting the roof over your head at risk to pay off credit card bills can be quite a risky strategy. It is important to honestly evaluate your fiscal discipline before considering a home equity loan to pay down debt.

Using the equity in the home to make needed home repairs or home improvements can be more justifiable, however. After all, a well repaired home, or a home sporting the latest in home improvements, will continue to grow in value, and some home improvements, such as new kitchens and bathrooms, can pay for themselves through increased home value.

Those considering a home equity loan, no matter what the reason, would be well advised to pay attention to the level of home prices, and to try to determine if prices are likely to continue their rise. Few real estate experts expect the incredible rate of home price appreciation to go on forever. For this reason, it is important to not tap all the equity your home. It is important to leave at least some equity in your home to protect yourself against the possibility of stagnating or declining home values.

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