Amassing equity by paying down the mortgage on your property is a good thing. Equity refers to the amount of your home that you own, without a lien. If your home is valued at $200,000 and you owe $100,000 on your mortgage, that means you have $100,000 in equity. One of the benefits of equity is that you can borrow against it. The question is, should you?
When You Should Borrow
One of the benefits of borrowing against your own home is that you typically pay less interest on an equity loan than if you applied for another type of unsecured loan. If you need money for an important issue, then borrowing against your home could be a good idea. Issues that might qualify include extensive home repairs or improvements, paying down or consolidating large debt, an emergency, or financing your child’s education. You can also use it to fund an investment property. If the rent you collect covers your home equity loan’s payment and if the amount of your mortgage plus your home equity loan is less than 80% of your home’s value, this can be a good use of your equity.
When You Should Not Borrow
Just like any other loan, if you borrow against your home equity, you are going to have to pay it back. Where borrowing against your equity differs is that if you do not pay the loan back, you could lose your home. Those are huge stakes! That means you should only consider a home equity loan for specific, important issues. You should not borrow against your home for luxury items, such as a lavish vacation. If you find yourself wondering if taking a home equity loan is worth it, consider speaking to a financial advisor or one of our experienced loan officers.
As a rule, do not use your home equity for anything that will not produce a positive return. Paying off high-interest credit cards will save you tons of money in the end and improving your home builds back some of the equity you are borrowing. Know our options contact PFCU today.