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Is a Home Equity Loan a Good Idea?

Updated January 14, 2025

Father and daughter work on a home he bought using a home equity loan (which was a good idea) — Seherzada Cehic / Getty Images

If you’re one of the many Americans who are currently sitting on an ocean of untapped home equity, you’re likely getting advertisements encouraging you to take out a 澳洲幸运5官方开奖结果体彩网:home equity loan. Is one 澳洲幸运5官方开奖结果体彩网:a good idea for you? Although the benefits of a home equity loan depend on your personal finances, taking out a home equity loan can benefit you if you use the funds to improve your home. On the other hand, using the money to fund a trip, buy a car, or spend the mꦉoney on something other than your home isn't the best use of the loan.

Key Takeaways

A home equity loan allows you to borrow a lump sum of money against your home’s equity and pay it back over time with fixed monthly payments.
A home equity loan is a good idea when used to increase your home’s value.
A home equity loan is a bad idea when used to spend frivolously.

How Home Equity Loans Work

A 澳洲幸运5官方开奖结果体彩网:home equity loan is a loan that allows you to take out a one-time lump sum and pay it back at a 澳洲幸运5官方开奖结果体彩网:fixed interest rate with equal monthly payments over an agreed-upon time frame. Home equity loans offer lower interest rates than other forms of 澳洲幸运5官方开奖结果体彩网:unsecured debt, such as credit cards and personal loans, because they use the equity you have in your home as 澳洲幸运5官方开奖结果体彩网:collateral for the loan.

Home equity loans, 澳洲幸运5官方开奖结果体彩网:ho😼me equity lines of credit (HELOCs), 澳洲幸运5官方开奖结果体彩网:reverse mortgages, and 澳洲幸运5官方开奖结果体彩网:cash-out refinances are all ways to get cash by borrowing against your home. By using your home’s equity in this way, you are taking on two main risks:

If you can’t afford to pay your loan(s) back, you could lose your home in 澳洲幸运5官方开奖结果体彩网:foreclosure.
If your home’s value decreases, you could become 澳洲幸运5官方开奖结果体彩网:underwater on your loan(s). In that case, you won’t be able to sell your home without taking a financial loss.

When a Home Equity Loan Is a Good Idea

A home equity loan can be a good idea when 澳洲幸运5官方开奖结果体彩网:used to fund a project that will directly 澳洲幸运5官方开奖结果体彩网:increase your home’s equity. Tapping into your home’s equity through a loan decreases the equity you have in your home until the loan is paid back. Using the loan to invest in a project that will increase your home’s value can help mitigate the loan risk.

A home equity loan is a 澳洲幸运5官方开奖结果体彩网:good alternative to a reverꦓse mortgage because it has much lo𒆙wer fees. However, it should still be used only when financing a project that will increase your home’s value.

Using a home equity loan to consolidate high-interest debt can be a good idea as long as you have the discipline and changed circumstances to pay off the home equity loan on time. Make sure that you are addressing any underlying habits that could have caused the high balance of debt, like overspending simultaneously, so you don’t end up stuck in a 澳洲幸运5官方开奖结果体彩网:debt spiral.

When a Home Equity Loan Is a Bad Idea

In general, a home equity loan is a bad idea when it is used for anything other than something that will directly increase your home’s value. A home equity loan is a particularly bad idea when used frivolously. Don’t use a home equity loan to fund a lifestyle that your income can’t sustain. If you can’t afford luxury dinners, cars, ꧟and vacations on your income, don’t erode your home’s equity to t𝔉emporarily live that lifestyle.

Is a Home Equity Loan or a Home Equity Line of Credit (HELOC) a Better Idea?

Both a homꦍe equity loan and a home equity line of credit (HELOC) borrow against your home’s equity and carry the same risks. A HELOC has a 澳洲幸运5官方开奖结果体彩网:variable interest rate, whereas a home equity loan almost always has a fixed interest rate. When 澳洲幸运5官方开奖结果体彩网:interest rates are rising, it’s better to take out a home equity loan than to carry a high balance on a HELOC. A HELOC can be a better idea for flexibility, particularly for real estate investors who will draw down and pay off the HELOC repeatedly over the course of purchasing multiple properties.

Should You Take Out a Home Equity Loan To Get a Tax Deduction?

No, you should not take out a home equity loan just for the tax deduction. If you already have a home equity loan, you may be able to get a tax deduction for the interest portion of the loan as long as you use the loan proceeds to “buy, build or substantially improve” the home that secures the loan. Keep in mind that this only benefits you if you 澳洲幸运5官方开奖结果体彩网:itemize your tax deductions. If you take the standard deduction, you’ll see no benefit to having a home equity loan for tax purposes.

Is a Home Equity Loan a Good Hedge Against Job Loss?

No. A home equity loan requires you to make repayments shortly a𓆉fter taking one out. Thus, tapping your home’s equity to get cash before a potential layoff has limited utility.

What Can Home Equity Loan Proceeds Be Used For?

You can use your home equity loan proceeds on whatever you want. Nothing but your own common sense is technically stopping you from putting the whole thing on black at your local roulette table. This is why it’s vital to understand 🦩the riꦺsks and take out a home equity loan conscientiously.

The Bottom Line

Like many other loan products, a home equity loan can be a good idea in some circumstances and a terri🅘ble idea in others. Understand the risks and consider whether risking your home is worth whatever you’re taking out the loan for. In general, you should only consider a home equity loan for something that can increase your home’s value.

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