Taking out a home equity loan can help people with significant equity in their homes to access much-needed cash at a lower interest rate than other forms of 澳洲幸运5官方开奖结果体彩网:unsecured debt. Home equity loan🧔s are cheaper because they use the equity in your home as collateral. While there are many risks to taking out a home equity loan, the biggest risk iܫs losing your home to foreclosure if you can’t afford to pay your home equity loan back.

Taking Out a Home Equity Loan for the🌟 Wrong Reasons

We interviewed several financial advisors about 澳洲幸运5官方开奖结果体彩网:home equity loans. Their consistent response was that they only encourage clients to take out a home equity loan for something that will add to the♔ir home’s value. The risks of taking out a home equity l♔oan are just too high for anything else. 

Thanasi Panagiotakopoulos, a 澳洲幸运5官方开奖结果体彩网:certified financial planner (CFP) and founder of, specifically advises against taking out a home equity loan to pay for college. 澳洲幸运5官方开奖结果体彩网:Marguerita Cheng, a CFP and owner of Blue Ocean Global Wealth, agrees and adds that there are better options, such as student loans, 澳洲幸运5官方开奖结果体彩网:that don’t risk your home. 

“Home equity should never be accessed for speculative purposes, including the purchase of real estate, because if the market goes against you, you could lose the value you’ve built up in your home,” warns , a CFP and founder of Empyrion Wealth Management.

Spiraling Debt

Similar to a 澳洲幸运5官方开奖结果体彩网:home equity line of credit (HELOC), there is no limit to the number of home equity loans that you can take out—as long as you continue to have the income and 澳洲幸运5官方开奖结果体彩网:credit score to qualify and your 澳洲幸运5官方开奖结果体彩网:home’s equity increases. However, the risk 💎of spiraling further and further into debt with home equity loans cannot be understated. 

Many lenders require a 澳洲幸运5官方开奖结果体彩网:combined loan-to-value (CLTV) ratio of 85% or less, but some lenders will approve a home equity loan with a CLTV as high as 90%. The CLTV takes the total balance of all your loans divided by the current 澳洲幸运5官方开奖结果体彩网:appraised value of your home.

For example, a person with a home valued at $100,000 and a current mortgage balance of $50,000 could be approved for a home equity loan amount up to $40,000. That is $50,000 first mortgage balance + $40,000 home equity loan balance ÷ $100,000 = a CLTV of 90%. 

If that person’s home value continues to incr🐲ease, they can continue to take out home equity loans periodically. Over time, instead of increasing their wealth thro𓃲ugh their increased home equity, they have spiraled further into debt—unless the home equity loan funds are used to make improvements to the home that increase the value above the amount of the debt.

Underwater/Upside-Down Mortgage

A big risk to taking out a home equity loan is what happens if your home value decreases significantly. If the balances of your loan are higher than your home’s value, you could end up upside down or 澳洲幸运5官方开奖结果体彩网:underwater on your mortgage. When this happens, you may find yourself unable to sell your home or move without losing money and tanking your credit in the process. This unfortunate situation happened to millions of homeowners during the 澳洲幸运5官方开奖结果体彩网:2007–2008 financial crisis.

Reasons to Take Out a Home Equity Loan

So when is the right time to take out a home equity loan? Remember that experts suggest applying for this type of debt should only be used to build up the equity in your home. This means tapping into the existing equity in your home for cash so you can make home improvements. Making renovations and other upgrades can add value to your home. Some th𒊎ings to consider before you 🌊apply:

• Consider the economic and lending environment so make sure it's the right time to take on more debt
• Ask yourself if you have the income to make payments on the loan
• How much value are you going to add to your home?
• Research and compare lenders to find the one that best fits your needs

Even if you are careful and only take out a home equity loan for all the right reasons, you can still find yourself in a financial bind.

The Bottom Line

Home equity loans are best used solely for projects that will lead to an increase in your home’s value. If you use them frivolously, then you erode your equity in your most valuable asset. Be cautious when 澳洲幸运5官方开奖结果体彩网:tapping into your home’s equity and remember that you coul𓃲d lose your home if you can’t keep up with payments, or you could end up una🌠ble to move if you’ve tapped that equity too much and your home’s value decreases.