How to Make Home Equity Work for You

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By Norma Erickson
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Can My Equity Work for Me?

A great many homeowners are looking for ways to use their home equity to improve their future financial position. High credit card debt, home improvements, educational expenses, and debt consolidation are all valid reasons to take advantage of the equity you have built up over the years. This article explains how to determine if a home equity loan is a good option for you and your financial future.

Difficulty: Moderate

Instructions

Step 1

Decide Yourself

Examine your personal finances. Make sure you are looking to actually improve your future financial position. Financing a luxury vacation or a new car will not accomplish this. These are things you should finance some other way. Lowering your current interest rate, reducing your monthly payments, financing education, or improving the value of your home are some examples of expenses that actually help improve your financial future.
Step 2

Potential Tax Implications

Consult a tax professional about the benefits and drawbacks associated with home equity loans. In most cases, a home equity loan is more favorable than a high credit card balance. The interest you pay on a credit card is not normally deductible; interest on home loans usually is. Be sure to ask about any limitations on interest deductibility that may apply to your personal circumstances.
Step 3

Learn the Options

Talk to your bank or lending institution about the different types of home equity loans available. There are standard lump sum payments usually at a fixed rate, lines of credit against your equity (usually at a variable rate) where you only pay interest on what you actually use, and cash out refinances that usually have lower interest rates, but higher closing costs. The only way to find out which is best for you is to ask lots of questions and take notes so you have something to refer to when making your decision.
Step 4

List Everything

Make a list of positives and negatives regarding home equity loans. Be sure your list is complete. It should include your motives, tax information, interest rates, each different type of loan in one column or the other, and any additional information that applies to your situation. Only then, can you decide whether looking for a loan is the right option for you.
Step 5

Financial Security

Analyze your list carefully. Be certain you are considering a loan for the right reasons. Make sure that the proceeds of the loan will actually improve your financial position in the future. Make sure you can afford the additional debt. Be aware of any potential risks. Then, make your decision.