If you’re like many homeowners, you probably have a lot of questions about home equity loans. You’re probably wondering what you can use one for. One of the most frequently asked questions among homeowners is, “Can you use a home equity loan for anything?”
The short answer is yes, you can.
There are a lot of great reasons to take out a home equity loan. But be careful! There are also a lot of risks associated with home equity loans.
In this article, we’ll answer this question in more detail and walk through some of the problems associated with home equity loans and some examples of bad uses for home equity loans.
Can You Use a Home Equity Loan for Anything?
You can use a home equity loan to pay for anything you want.
But just because you can doesn’t mean that you should.
When you take out a home equity loan, you run the very real risk that your house could be repossessed. If you fail to make your payments, the bank or lender has the right to seize your home and sell it to recover your debt.
That’s why you should always, always err on the side of caution. To give you an idea of what you should not do, here are five examples of bad ways to use a home equity loan.
Buying Luxury Goods
You should use a home equity loan for items that increase your home’s value, increase your earning power, or otherwise benefit your bottom line. It’s a great idea to use a home equity loan to remodel your kitchen, for example, or to add an extension to your house. Those moves have been proven to significantly increase the resale value of homes.
On the other hand, buying luxury items like expensive sports cars and luxury vacations will not increase the value of your home. Those luxuries won’t increase your earning power, either. Sure, we all need a little bit of luxury in our lives, but it’s not a good idea to borrow against your home to pay for that luxury.
Paying For Ordinary Items
If you find yourself planning to use a home equity loan to pay for daily necessities like groceries and clothes, you should take a step back. That’s not what you should use this type of loan for.
When you take out a home equity loan, you are putting your home on the line. No matter how you look at it, a home equity loan carries a huge, built-in risk: if you default on your payments, you could lose your home.
That’s why home equity loans should never be used to pay for basic expenses like groceries, clothing, or transportation. Instead of taking out a home equity loan, take another look at your budget and see if you can figure out a different way to make ends meet. There may be some areas where you can reduce your spending so that you have more left over to cover your necessities.
Paying Off Credit Card Debt
It’s tempting to use a home equity loan to pay off your credit card debt. After all, your credit card probably carries a higher interest rate than your home equity loan would. That makes it easy to rationalize the choice to take out a loan against your home in order to pay down your credit card debt.
Before you do that, though, take a long, hard look at what got you into credit card debt in the first place. Be realistic. What are your spending habits like? Are you going to get into debt all over again once you’ve repaid your credit cards?
If you’re like most big spenders, paying off your credit cards won’t solve your problem. Instead of putting your home on the line, consider a new approach to budgeting so that you aren’t tempted to overspend in the future.
Putting Your Kids Through College
College is a huge expense, so it’s no wonder many people want to use a home equity loan just to help put their children through college. However, if you do this, you’ll be shouldering a huge burden that will probably still be with you long after retirement.
Student loans are a better bet for most families. It’s also a good idea to have your kids take on at least part of the debt themselves. After all, they have decades of working years ahead of them, so they’ll have more time to pay off a loan.
Launching a Small Business
You can use a home equity loan as a good way to expand an already-successful business. But staking your house is a risky move, and you should never do it unless you are absolutely certain that your venture is going to be a success.
Unfortunately, 8 out of 10 small businesses fail within 18 months of being launched. That’s an 80 percent failure rate. This means that whatever your small business is, it has only a very slim chance of success.
Clearly, it’s not a good idea to put your house on the line for a small business that hasn’t even gotten off the ground yet. It’s a better idea to raise funds from family and friends in order to get your enterprise up and running.
We’ve gone over the risks behind some of the ways you can use a home equity loan, but we haven’t talked about the other options out there.
A sale-leaseback program allows you to sell your home and then stay in it. That means you’ll have access to your full home equity without running the risk of losing your home.
There are plenty of ways to use a home equity loan. Talk to a financial consultant today to find out what is and is not a good use for you.