How to Use Your Home Equity Wisely

Home equity is a powerful asset. You can use equity to realize a profit when selling your home -- if the market conditions are good -- or you can tap into your equity for a home equity loan. The Federal Trade Commission reports that banks may offer to lend up to 85 percent of the equity in your home. That means you could take out a loan for $85,000 if the equity in your home is valued at $100,000. Equity is determined by subtracting the fair market value of your home from the remaining balance on the mortgage.

Instructions

1

Sign up for financial management and home ownership workshops at a local credit counseling agency. Don't wait until after you have financial problems to consider credit counseling. A nonprofit counselor certified by the U.S. Department of Housing and Urban Development can offer advice that will prevent you from making unwise decisions with home equity. Find a counseling agency in your area by checking the HUD website.

2

Learn about how the value of real estate can climb or fall. Home equity increases when property values go up, but can vanish entirely when values go down. Ask the housing counselor how a recession or housing bust can result in your owing more than the house is worth, perhaps because of falling prices and an outstanding home equity loan.

3

Leverage the equity in your home to improve or maintain the value of your property, which is one of the wisest uses of your equity, according to the Federal Trade Commission. Replacing a furnace in the dead of winter or repairing a leaky roof is considered a wise use of a home equity loan, according to the FTC.

4

Borrow against your equity for other legitimate emergencies and worthy expenses. Paying for school tuition costs and medical emergencies are also a wise use of your equity. The key to using equity wisely is to avoid tapping into it for frivolous expenditures.

5

Protect yourself from frivolous spending by voluntarily lowering the amount of money you can borrow against your house, if necessary. Your bank may approve you for an $85,000 home equity line of credit but that doesn't mean you have to keep such a large credit line. Call your bank and have the credit line reduced if your circumstances change. For example, you may have elected to take an early retirement and feel uncomfortable having such a large credit line based on your reduced income. Voluntarily cutting your credit line can keep you out of financial trouble.