As a homeowner in California, you may be tempted to access your home’s equity and use it for other immediate needs or wants. There are ways to draw funds from your home’s equity such as refinancing your mortgage to get cash out, home equity loan or home equity line of credit.
But does it make sense to use this to replace your roof or remodel your home? Paying off your credit cards could be tempting. Maybe you could finance Junior's college education. What about supplementing your retirement income?
These are tough decisions. In fact, any reason might be good or bad, depending on your situation. Which is exactly what you didn’t want to hear, right?! Here’s the deal: It all boils down to responsible borrowing.
Let’s consider six common home equity cash-out scenarios and why they might – or might not – make good sense for you.
Use Equity to Renovate? Yes.
At Fremont Bank, we’ve found that home improvements are "the No. 1 reason" home equity lines of credit, or HELOC are used. Second on the list are major purchases, which include vehicles, appliances or other durables rather than extravagant weddings or exotic vacations. It really does seem that our clients are using home equity for what they need versus what they want and we’re especially pleased about that.
Use Equity for Investing? Maybe.
Home equity could be used to invest for a higher return as long as interest rates remain low. It’s typically inexpensive cash. Just think if you were to borrow at 4 percent and turn around and make an investment in the stock market and yield 8 percent, you will have made 4 percent on your money. Not bad. However we recommend caution and suggest that your consult with your financial advisor before using the equity in your home for investing.
Use Equity as a Student Loan? Maybe.
With a HELOC, the interest rate may be lower and the maximum loan amount higher than some other types of education financing. This can be an attractive way to finance a child's education. But this strategy isn't risk-free. If you build up a huge debit over time, you may find yourself struggling and possibly delaying your retirement.
Use Equity as Retirement Income? Maybe.
Some retirees use their HELOC to meet their current income needs in years when their investment returns just aren't sufficient for that purpose. But again, there's a risk because eventually the retiree will have to make payments on the HELOC and possibly face a balloon payment at the end of the repayment period.
Use Equity to Pay Off Credit Cards? Use Caution.
Use extreme caution if you choose to pay off credit cards or other unsecured debt with your HELOC. I know, you’re thinking “but everyone does it” right?! When you run the numbers, it may make sense. But, if you tend to accumulate new debts quickly with impulse purchases on your credit card, this can lead to serious trouble over time.
Just consider this: When you free up unsecured debt like credit cards for secured debit such as a mortgage or a HELOC, this could be a risky situation for you to be in.
Use Equity for Emergency Fund? Maybe.
Having a HELOC that offers a low rate can be a more viable option than keeping a large sum of money in a low interest bearing bank account. Of course, you always need to remember that if a major life catastrophe happens and if you can no longer earn an income, you may be putting your home at risk. Also, don’t be tempted to “redefine” what your emergency fund should be used for. It may be too easy to access it for wants instead of needs.
If you have questions about a home equity line of credit, please contact one of our loan specialists at 866-359-0167. Be sure to ask about our current promotional programs and rate discounts.