4 Questions to Ask Before Taking Out a Home Equity Line of Credit

If you’re looking to invest in a new car, a remodel, or any other expense that you’ll need to borrow for, you might think that a home equity line of credit is a good way to do it; and you wouldn’t necessarily be wrong. But, before taking on a home equity loan, or any type of borrowing, you first need to ask yourself a few questions. Just because you’re able to pay your bills now, including mortgage payments and other debt, your situation could change in the future and you don’t want to find yourself drowning in debt.
How much debt do you currently hold?
It’s surprising the number of people that know how much their monthly payments are on their mortgage or credit cards, even if it’s just the minimum on some, yet don’t know anything else about their debt. In the case of their mortgage, they may not be aware of exactly how much time is left on it and in the case of credit cards, they may not know what their total balance is or even what interest rate they’re paying. Make a list of the total amount of debt you hold and when it will be all paid off.
Will you be out of debt when you reach retirement?
You should always be aiming to be completely debt free by the time you reach retirement. That means no mortgage payments, no credit card debt, no debt of any kind. If the numbers from your current debt (above) extend past the time you retire, it’s probably not a good idea to take out a home equity line of credit or any other kind of debt.
What type of debt do you hold?
When talking about debt, there is good and there is bad. Good debt is debt that is an investment in something you will actually own, such as a mortgage. This type of debt usually comes with pretty low interest rates. Credit card debt, or consumer debt, is considered to be some of the worst type of debt. Not only does it come with high interest rates, but also because it’s paying something back that you’ve most likely already used. In other words, you’re not actually investing in anything that will help you in the future.
What is your debt to income ratio?
This is a huge question to ask because ultimately, you need to know how much you’re bringing in and how much you’re paying out. To calculate your ratio, divide your annual net income by the amount of your debt. If it’s consumer debt you hold, the amount shouldn’t be any higher than 15% – 20%. If it’s good debt you hold, it can be as high as 100% – 151%.