How to Manage Home Equity

Managing home equity properly is crucial for avoiding excessive debt or even foreclosure. Some people who tap into their home's equity for loans discover later that they are upside down on their mortgages, meaning that the equity has vanished with the house now worth less than the mortgage balance. This usually happens after a dramatic decline in the property's value because of a housing slump, deep recession, declining neighborhood or some combination of the three.

Instructions

1

Make at least a 20 percent down payment when purchasing a home. This creates instant equity and provides a cushion against cyclical downturns in the market.

2

Turn down offers to apply for home equity loans unless you really need the money for an important reason, such as medical bills or tuition payments. The Federal Trade Commission warns that you should not tap into your home's equity for frivolous expenses such as vacations, cars and debt consolidation. Such purchases can deeply tap into your home's equity and leave you in a vulnerable position if housing prices drop.

3

Keep balances on home equity loans low if you do take out a loan. Ideally, keep the balance to about 10 percent of the credit limit. That means for a $50,000 line of credit, your balance should never exceed $5,000. Pay the balance down quickly if you do exceed more than 10 percent of the credit limit. Keeping balances low helps your credit score while you make on-time payments and also helps avoid excessive debt.