When To Borrow Against Your Home?

Hello All,

A major source of wealth for many Americans is home ownership. However, home ownership usually impacts your wealth through equity accumulation - or the residual difference between what you owe on your mortgage and the market value of your home. This creates a problem for homeowners: real estate equity is not liquid - its not like cash or stocks which can be easily exchanged or sold. This leaves the homeowner with an asset they cannot easily access. - This is problem if you want to aggressively build wealth.

One option for getting at the equity in your home is take out a loan against it. However, there are several guidelines that you might consider when deciding on borrowing against equity. These apply for both lines of credit (HELOCs) and bread and butter equity loans.

Its okay to borrow when:

1) You hate borrowing, it stresses you out.

2) The loan is used to consolidate unavoidable consumer debt - like a car loan - and you pay it off fast.

3) The funds are used for major investments - such as starting a business, getting an education, doing home improvements or buying property or stocks. You should have good track record of making sound investments also.

4) You can handle the payments, have a sufficient cash reserve and don't have a ton of other obligations.

Its NOT okay to borrow when:

1) The funds are used for consumer junk - coloring books, cheap crap from Target, Twinkies, etc. Don't borrow against your home equity if you are a spendaholic.

2) Debt makes you feel relieved.

3) Borrowing will frustrate other important goals - like paying for your kids education.

4) You do NOT have sufficient funds to pay the debt if your income drops.

5) The loan eats up all the equity in your house.

Finally, I'd be remiss if I did not mention that some financial Gurus say you should avoid debt - notably Dave Ramsey. However, prudent borrowing should not be dismissed out of hand. If its done properly accessing your home equity via a loan can be an important part of your personal financial picture.

Best,

James