Three Situations When A Home Equity Loan Is Not A Good Idea
If you have equity in your home, you may be tempted to take advantage of this equity and obtain a home equity loan to give you cash to fund other things. This can be a great idea if done right. However, there are some situations when a home equity loan is not a good idea at all. If you find yourself in the following situations, you would be wise to avoid taking more money out of your home equity, and try to cashflow your expenses instead.
Paying Off Credit Cards
A home equity loan for the purpose of paying off credit cards is actually a good idea. You can erase most or all of your debt and consolidate everything into one easy payment every month. However, a home equity loan for the purpose of debt consolidation is not a good idea if you lack the willpower to stick to a budget. If you don't cut up the credit cards and stop using them, you will find yourself right back in the same situation, only you'll have credit cards and a home equity loan to pay off. If you don't plan to hold yourself accountable or don't think you can stick to a cash-only budget, skip the home equity loan for debt consolidation right now.
Planning to Sell Soon
If you are not planning to stay in your home for at least another five years, a home equity loan is likely a bad idea. This is especially true if you live in an area where the housing market is unstable, or the market is typically a buyer's market. Taking out a home equity loan now may put you underwater in your mortgage if you sell in the next few years. This could cause you to owe money at closing and be forced to write a check that you may not be able to afford in order to get out of your house.
Financing Unnecessary Expenses
If you are thinking of obtaining a home equity loan for the purpose of financing a vacation, a wedding, a new car or some other unnecessary purchase, skip the trip to the bank. It is unwise to owe more on your home than absolutely necessary, and using the equity in your home to pay for toys and vacations is a very bad idea. Your vacation or toy purchase could very well cost you your home if you wind up in dire financial straits. Save up and pay cash for these items; good things come to those who work hard and save.