Is there ever a good time to use your home equity?
Homeowners who have equity available in the bond accounts might be tempted to withdraw some of the money and use it for more immediate needs or wants. While it is not always a wise decision to take equity out of the bond, there are a few circumstances where it can actually benefit the homeowner.
If a homeowner does decide to use their home equity, it should be utilised in a way that will put the homeowner in a better financial position than they were in previously.
There are a few common situations in which homeowners choose to use their home equity. While some reasons for using the equity make good financial sense, others don’t – the decision will largely be based on the homeowner’s circumstances and future plans.
When to use home equity?
Should I use it to renovate my home?
Yes – One of the most common reasons that homeowners withdraw equity is to renovate and improve their property. There are a number of benefits to using home equity for renovation. Apart from the fact that it will add to the home’s marketability when it comes time to sell, it gives the homeowner the opportunity to change aspects about the home that they may not have liked when they initially moved in.
The homeowner can update areas of the home such as the kitchen and bathrooms to give the home a more contemporary look and feel or they could build on a much-needed extra bedroom. This will add to the occupants living experience in the home and improve the home’s value.
When deciding to renovate it is important not to overcapitalise and to ensure that the planned project will, in fact, add to the perceived value of the home.
Renovation is a very attractive option if the property has appreciated in value a lot and the homeowner has substantial equity built up.
Should I use it for investment purposes?
It depends – With investment there is always an element of risk so using home equity to fund an investment depends on whether the homeowner has done their research and is confident that the degree of risk is worth the potential return.
Part of the research a homeowner should do is whether the return on the investment is going to be greater than the interest charged on the borrowed money.
Another popular use for home equity is for the homeowner to start their own business or further their education. In scenarios such as these it would be advisable to consult with an objective financial advisor who can provide guidance and advice regarding these options.
Should I use it to pay for my children’s education?
Possibly – Interest rates on student loans start at prime and go upwards depending on the credit profile and level of affordability. In some cases, the interest charged on the home equity would be lower and the loan amount could be higher. While using home equity to finance your children’s education is a tempting option, it does have its risks.
The feasibility of this option largely depends on the parent’s age and financial well-being. Taking equity out of the bond could delay the homeowner’s retirement, or worse put them in a financial position where they could risk losing their property. In these instances, it is best not to take the money from the home equity. According to studies, children are generally better off with financially secure parents than being financially secure themselves and having to look after their parents.
Should I use it as an emergency fund?
Perhaps – If the homeowner is in dire need, home equity can be used in an emergency, however, it is important to remember that at some stage it will need to be paid back. Home equity should only be used as an emergency fund if the homeowner has no other available options. Ideally, homeowners should put aside money each month to build up a contingency fund, so they do not find themselves in a situation where they have to use their equity for an emergency.
Should I use it to consilidate debt?
No – Many homeowners opt to use their home equity to pay off credit cards, car loans, and other forms of personal debt. This option will provide the homeowner with additional disposable cash initially, but if they obtain new debt they will be far worse off in the future. Interest rates on credit card debt and personal loans are generally higher than bond interest rates, so it will make financial sense from that perspective. However, if the homeowner does do this, they will have to ensure that they don’t continue to use credit cards and take out further debt.
Homeowners who are thinking of using their home equity should consult with a financial adviser if they have any doubts or would like an objective opinion. Regardless of the reason, a homeowner uses their equity for, the most important aspect is that the decision should be beneficial and does not hinder them financially in the future.