TULSA, Okla. — For most of us, our home is our largest asset. Its equity in it can be a lifesaver during a financial emergency. But financial experts warn there are important considerations before borrowing against your home.
Equity is the difference between the current market value of your home and what you still owe on the mortgage, or it's current market value if it is paid off.
A home equity loan lets you borrow a lump sum with your house securing the loan, typically with a fixed interest rate.
With a home equity line of credit, you get approved for a maximum credit limit based on your home's value. You can then draw out money as needed and pay it back for the duration of the loan's terms, often with a variable interest rate.
Taking out either type of loan comes with one major drawback, according to financial analyst Linda Bell.
"You're actually putting your home on the line. So if you can't make those payments, you could potentially lose your home," Bell said. "So it's important not to tap into that equity for frivolous things like a vacation."
When it comes to appropriate uses for home equity, Bell recommends being strategic.
"To pay off this high interest debt ... or perhaps to do some significant renovations on my home that could actually potentially increase the value of my home. So it's important to be kind of strategic when you decide to tap into your home equity," Bell said.
Outside of these scenarios, Bell advises caution when borrowing against your home.
"I would say only significant emergencies," Bell said.
Before taking out a home equity loan, Bell suggests asking yourself if it will provide a necessary lifeline or if you can manage your financial situation without it?
This is especially important if you haven't built up much equity in your home or aren't confident you can repay the loan, as defaulting could result in losing your home.
This story was reported on-air by a journalist and has been converted to this platform with the assistance of AI. Our editorial team verifies all reporting on all platforms for fairness and accuracy.
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