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Use Your Equity Wisely

Home ownership has its perks. One of those is a potential fund for vacations, college educations, home improvements, and eliminating credit card debt, among others. Indeed, home equity loans can pay for upgrades to the roof, landscape, cabinetry, and other places in the home that can reap gains if you're selling real estate.

Depending on your financial, family or personal condition, tapping into the free and clear value of your residence may present pitfalls:


You Might Surrender Your Homestead Exemption

As a resident of Helena MT (and elsewhere in Montana), you can exempt (i.e., keep) up to $250,000 of the equity in your home out of reach of creditors who get a judgment against you. This includes credit card companies. When you roll credit card debt in pursuit of lower interest rates, the formerly unsecured credit card balances become secured debt. If you don't or can't repay your home equity loan, the lender gets to foreclose -- and gets paid ahead of your exemption claim. You get what equity, if any, is left.

Refinancing a Student Loan

A home equity loan could lower your student loan interest -- but close doors to handle financial distress. With a federal student loan, you may qualify for repayment options such as income-based repayment and loan forgiveness. With a bank holding your home equity as collateral, you don't have these protections if you fall behind.

In the Home Market

The extra baggage from a home equity loan can weigh down your efforts if you're buying real estate or selling real estate. If you're doing both simultaneously, you want enough gain from the sale for a down payment for buying a home.

Having less equity for a down payment can increase your costs of buying a home. Unless you front 20 percent of the purchase price, you'll have to carry private mortgage insurance. Expect to pay anywhere from 0.3 percent to 1.5 percent of the loan per year for this -- until your home achieves 20 percent of the new mortgage.

You might not want a home equity loan if you're planning or are forced into relocation -- for example because of a new job. Having to sell quickly might cost you higher offers and more money to apply to buying real estate. Also, watch out for rising home prices, especially if you move where the cost of living is higher. (Average home prices in Helena Mt. increased from $229,894 in 2014 to $233,868 in 2015.)

Also, before you resort to your existing home equity to find more value from enhancements such as a new floor or remodeled bathroom, consider a home improvement loan. This type of personal loan is unsecured, which means you're not depleting your existing equity to build it. You'll likely might reap more gains.

Home ownership is an asset. Home equity loans can negatively impact it you unnecessarily use them.

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