Posted: 1 Feb '23

How NOT to Use Equity Lending

How NOT to Use Equity Lending

One key benefit of homeownership is that as your home's value increases, you build equity, which you can use to secure a loan. Homeowners can often use this loan for virtually any expense, but some use cases are more desirable than others. We have covered more on this below. Call us today to learn more.

What is Home Equity Lending  

Equity lending is using your home equity to secure a loan from a bank, lender, credit union, trust company, etc. The amount of equity you have will determine how much you can borrow through a home equity loan. A loan against your home equity can either be a good or wrong financial step. It depends on how you intend to spend the money. We have highlighted how not to use equity lending below.

Things You Should Not Use Home Equity Lending For

Spending on Luxuries

Spending a home equity loan to fund a lifestyle your regular income cannot afford is proven unwise. Equity loans should be taken to fund projects that add value, such as renovating your home. Luxuries like vacations, fancy car purchases, and fine dining are among the things you should not finance with equity lending. 

Paying For College

Attending college is a brilliant future investment, but this doesn't always guarantee financial success. Before financing your college degree with your home equity, you want to consider the risks of losing your home if you fail to secure a lucrative job to help you repay the debt. To make it worse, you may end up not finishing college or finishing and not securing a job in time. Additionally, there are several ways you can finance your college without tapping into your home equity. 

Starting a Business or Investing 

Everyone wants to make more money. So, starting a business or investing in your dream project sounds just like the perfect idea. However, you don't want to gamble away your home equity loan with something futuristic you hope will go well. To minimize the risks of default, you want to avoid taking a loan against your home for business or investment reasons. 

Settling Other Debts Without a Plan

Loans secured using your home equity have lower interest rates and could be perfect for debt consolidation. However, there's always a catch. Debt consolidation requires a well-thought-out strategy that involves negotiating with lenders and committing to a payment schedule. If you don't have these plans, you are probably just adding another debt. 

You also need to understand that taking home equity loans to pay off your debt means you have not found other ways to solve your current financial problems. That said, you don't want to use equity lending to fund your daily expenses, such as groceries, clothing, utilities, or insurance, as this could mean you are spending more than you can afford. 

Make the Right Choices 

Building your home equity takes time and effort, and you don't want to take on a loan to finance a risk-on investment. Before utilizing equity lending, reach out to us, and we'd love to guide you through the different loan products and how well you can use them.