The short answer to the question, "Can you use a home equity loan for anything?" is yes. Just because you can, however, does not mean you should.
Getting a home equity loan is a big decision. Although you can use the proceeds for anything (pinball machines, fancy cars or a lifetime supply of candy), you should avoid these pitfalls to ensure your home equity loan provides you with adequate financial benefit.
4 Home Equity Loan Pitfalls
1. Borrowing More Than You Need
Just because you have the equity does not mean you should borrow as much as you can. In a home equity loan, you will pay interest on the total amount borrowed whether you use it or not. If the cash is available, you might be tempted to spend it on things you may not need.
2. Consolidating Debt without Committing
According to an article from NBC News, the total amount of credit available, number of credit card accounts and the average of amount of credit card debt per cardholder ($15,654) have all increased over the last two years. With credit card debt typically racking up interest at a much higher rate than other types of debt, it is no wonder paying off large credit card balances is one of the most popular uses for home equity loan proceeds.
Be careful about paying off credit card debt with home equity. If you have not truly committed to changing your spending habits, you will soon charge your credit card balances back up and also have a home equity payment. This spending behavior could leave you in a worse financial position than before consolidating debt.
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3. Not Asking about Prepayment Penalties
If you can pay off your home equity loan early, then by all means do. But first be sure you do not take out a home equity loan that charges you a penalty or fee for paying off the loan early. Making a smart financial decision should not cost you more money.
4. Not Increasing Your Emergency Fund
A home equity loan adds a monthly obligation to your budget. Increase your emergency savings fund to accommodate your home equity payment in the event of a financial emergency.
Ask a Mortgage Lender if a Home Equity Loan Is Right for You
If you think a home equity loan might be right for you, we encourage you to contact one of our experienced mortgage lenders at America's Credit Union. We offer home equity loans with flexible financing, a personalized approach, in-house servicing and many other benefits. Email us at info@americascu.org.
