Lenders want you to borrow against your home equity again. The question is, should you? There are times when taking the risk can make sense, but only under certain circumstances. Here are five uses for home equity that can work for you:
Home improvements
But only if they actually add value and you pay cash for up to half the cost. Few home improvements will increase the value of your home enough to cover their cost. Many projects return between 50 and 80 cents on the dollar, assuming you sell within a year of completing the project. Borrowing only half the cost of a remodel and paying cash for the rest can help you curb the urge to overspend.
Debt consolidation
But only if you can pay off the balance fast. There are many, many problems with using home equity to pay off credit card and other high-rate debt. One of the biggest is that you are turning consumer debt that could be discharged in bankruptcy into secured debt that can't. If it would take you five years or more to pay off your HELOC (home equity line of credit), you might have too much debt for a do-it-yourself solution.
Emergency expenses
But only if you have exhausted your nonretirement savings. Financial planners typically recommend an emergency fund equal to three months' worth of expenses or more. It can take a typical family two years to save up that much, and a lot can go wrong in the meantime. A HELOC can supplement an inadequate emergency fund and be a comforting Plan B while you build or rebuild your cash stash.
College costs
But only if you are the parent and can pay off the balance before you retire, while still being able to save for retirement. Students have access to federal student loans, which come with low fixed rates, numerous repayment options and the possibility of forgiveness. If borrowing would keep you from retirement, though, consider other alternatives — like a cheaper school.
To protect your portfolio in retirement
But only if you open a reverse mortgage line of credit early in retirement for just this purpose. Good financial planners have long hated reverse mortgages. Today's reverse mortgages are cheaper and safer than in the past, however, thanks to improvements in the Federal Housing Administration's Home Equity Conversion Mortgage program.