When to Avoid Using Home Equity for Home Improvements

Building your home equity is the key to long-term financial stability. If you are considering a home equity loan, consider the factors that indicate that it may not be the right time to make that move. It is tempting to mortgage your home in order to receive the money to make improvements to your home. However, the option has intrigued many home owners into bad situations like foreclosures or bankruptcies, when they are not responsible about the decision.

Upside Down Mortgage

The biggest factor to consider is your debt on the home, compared to the actual value of the home. Consider what your loan amount is, and compare it to the value of your home. Divide the two numbers. If the numbers are high, a HELOC may not be the best thing for your situation.

An upside down mortgage describes a property that is over-encumbered with mortgages. Put simply, when you owe more than your property is worth. This occurs when real estate home prices drop significantly. The value of your home will increase over time, but when you take one specific moment of time, the value may not be enough to support the mortgage.

Out Pricing the Market

You have to consider the improvements you want to make to your home in terms of the actual value it will bring to your property. There are some "living enjoyment" improvements you may make, such as placing a hot tub in the yard or wiring speakers through the house. These repairs will rarely increase your sales price. However, if you feel you will get sufficient enjoyment from them, you may choose to make them anyway.

Other improvements, such as redoing kitchens, baths or landscaping, should be considered in terms of return on investment. If a real estate expert evaluates your property and says it is already at the high end of the market for your neighborhood or city, any improvement will not help to increase the sales price of your home. Be sure to keep the repairs on the home to useful repairs that will increase the value of your home. 

Compromising Financial Health

If you live in an expensive neighborhood , you may consider taking a home equity line of credit (HELOC) to make luxury improvements. However, just because you can get approval for these loans does not mean that you should. Consider your total debt, including auto loans, student loans, credit cards and other forms of debt. Other forms of debt can include child care of private school costs, gas, and food or clothing expenses. Evaluate carefully what taking the new loan would mean to you in terms of your spendable income each month. Carefully assess your quality of life before you get into an equity loan.

Plan for the unexpected, for example, reflect on you or your partner losing your jobs and what that would do to you financially. If you cannot continue to make both your mortgage payment and your HELOC payment, you will be compromising your financial health. Your home is a long term investment, and you need to avoid thinking in the short term to assure future stability.