“Why You Should Be Cautious About Using Home Equity”

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Understanding Home Equity

Equity is the difference between your home’s current market value and the amount you owe on your mortgage. It can be a valuable asset to access cash when needed. With home values soaring in recent years, many homeowners find tapping into their equity an enticing option. According to the Federal Reserve Bank of St. Louis, the median home price has increased from $327,000 before the pandemic to $436,800 in the first quarter of 2023.

When Not to Tap Into Your Home Equity

However, accessing your home equity isn’t always advisable, especially when interest rates are high or for non-essential expenses like vacations. Home equity loans and lines of credit (HELOCs) are secured by your home, meaning you risk losing it if you fail to make payments. Here are six reasons to avoid tapping into your home equity:

1. High Interest Rates

Interest rates are currently high due to the Federal Reserve’s rate hikes since March 2022. Home equity products often have higher rates than primary mortgages, and many come with variable rates, making future hikes a risk. If your credit score is less than ideal, rates can be even higher. It may be wise to wait until rates drop or your credit improves.

2. Non-Essential Expenses

Using home equity for vacations or large optional expenses isn’t the best strategy. These expenses don’t improve your financial health and can lead to long-term debt. Instead, consider saving for these costs or using other financing options.

3. Paying for College

Exhaust all scholarships, grants, and federal student aid before considering home equity for college tuition. Federal student loans often have lower rates and more flexible repayment options. Using home equity for education can risk foreclosure if payments are missed.

4. Investing

Investing with home equity is risky. Real estate and stock market investments can be unpredictable. If investments fail, you could lose your home equity and still owe the debt. It’s safer to use other funds for investing.

5. Buying a Car

Home equity loans and HELOCs may have similar rates to auto loans, but the longer repayment terms can result in higher total interest. Cars depreciate quickly, and using home equity for a car can lead to owing more than the car’s worth.

Alternatives to Tapping Into Home Equity

Consider these alternatives to avoid risking your home:

• Dedicated Savings Account: Set up automatic transfers to a high-yield savings account for specific expenses.
• Borrow from Friends or Family: This can offer favorable terms, but ensure you have a written agreement.
• Unexpected Windfalls: Allocate tax refunds, bonuses, or inheritances towards your savings goals.
• Extra Income: Consider part-time jobs, side hustles, or selling unused items.
• Other Finance Options: Unsecured personal loans or balance transfer credit cards with 0% APR offers can be alternatives.

The Bottom Line

Home equity products can provide valuable cash access, but the risk to your home is significant. Carefully evaluate the risks before tapping into your equity. If you decide to proceed, check your credit report and consider improving your credit score first.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you make the best financial decisions for your home.

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