How to Wisely Use Home Equity

Home equity is a great thing and the more you have, the better off you are. When you have home equity, you are either a lot closer to paying off your mortgage, or you can use it to obtain a second mortgage. But before you go ahead with the latter, first make sure that you’re using your home equity wisely, so that you don’t pay more than you have to and so that you can still be a lot closer to paying off that mortgage!
Know what fees you should be paying, and which ones you shouldn’t
Fees vary with different home equity loans and the ones you will pay will depend on your credit score. If you have a good credit score, you shouldn’t have to pay any application or appraisal fees; but do keep in mind that recording fees and annual fees on HELOCs are both very common. If however, you do not have a great credit score at the time you tap into your home equity, you may have to pay various other fees due to the higher risk for the lender.
Know how much to leave yourself
Your lender might be willing to allow you to tap into 90% or more of your home’s equity, but you really shouldn’t. Not only does this leave you at a huge risk if you aren’t able to pay it off (and you could lose your home,) but you might also drain yourself dry in case of an emergency. Many households don’t have a giant emergency fund tucked away – it’s hard enough to pay bills, buy groceries, and live from day to day. Your home’s equity then, is essentially the only emergency fund that you have. And if you use it all for that home reno or that grand family vacation, you might not have any left when you truly need it.
Know the taxes
Sometimes the interest from a home equity loan or second mortgage is deductible, and sometimes it isn’t. It all depends on what you can itemize and what you cannot and truthfully, it can become a complicated matter. The important thing to know is that just because you’re using your home equity doesn’t mean that you automatically get to claim the interest on that loan on your taxes. It might, and a mortgage broker will be able to advice you based on your own situation; but you should never take it for granted or use the “tax-deductible” reason as the sole reason to tap into your home equity. Along with that, it’s also important to know that the interest will only be deductible on amounts less than $100,000. While you can take out a loan greater than that amount, any interest after the $100,000 mark will not be tax deductible.
Home equity really is the most valuable thing a homeowner owns, and you should know that it’s always there should you ever run into an emergency or need a large amount at one time. But, before you use it always, always know how to use it wisely – so it can continue to be there for you when you need it and you don’t end up spending too much on your own home equity.