Smart Home Equity Borrowing

If you own a home and have thought about borrowing to make home improvements, chances are you’ve heard about home equity borrowing. This popular and flexible borrowing solution, which lets you tap your home’s equity, can be an attractive way to finance not only home improvements, but also other major life expenses. You can even choose how you want to receive funds – either as a revolving home equity line of credit or a lump-sum loan.

Graphic of a home with dollar signs around it, to symbolize the collateral value of a home.If you're considering home equity, you must keep one important thing in mind: you are using your home as collateral. So, if you default on a home equity loan, you could lose your home. That's why it's essential to use home equity wisely. Here are three smart uses of home equity credit:

  • Home improvements. Your home is arguably your greatest asset, so it's important that you take care of it. There are certain improvements, such as kitchen or bath upgrades that can actually improve the value of your home. It's important to understand what improvements will help retain or increase the value of your home and to stick to a realistic budget to make them.
  • Debt consolidation. If you have credit card or other high-interest debt, it may make sense to consolidate your loans into a home equity loan. You'll reduce the amount you spend on interest. The biggest mistake you can make, however, is paying off your debt with home equity and then running it up again.
  • College financing. With the high cost of college tuition and attractive rates on home equity loans, many parents are using home equity loans to help finance their children's education. It's important to look into all the college financing options and to talk to your tax advisor to find the most cost-effective option for you.

In short, one of the greatest benefits of home equity borrowing – the flexibility to borrow for any purpose – can be one of its biggest drawbacks if you don't use the funds wisely. However, by borrowing and spending with caution, you can take advantage of a valuable tool to help you finance life's expenses.