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Lenders want you to borrow against your home equity. Due to increasing home values and a slow mortgage market, banks are starting to market home equity lines of credit. Home equity lines of credit are generally seen as a cheap source of credit.

However, borrowing against your home equity can cause problems. Because of variable rates, payments can increase after the initial interest only period is over. With less equity, you have less security if the value of your home drops. This can cause you to be vulnerable to foreclosure if you can’t pay your loan back. If you take the risk, do it with caution. Do not borrow more than the current value of your home so that you can get good terms and rates, as well as having the security to deal with an emergency. Here are some different options to consider when deciding how to spend the money from your home equity.

Debt Consolidation

Debt consolidation is an option, especially if you can pay off the balance quickly. Do not use home equity to pay off credit card debt or other forms of high rate debt. This can turn consumer debt into secured debt that cannot be discharged if you file for bankruptcy. You will also glance over a potential spending problem that will leave you deeper in debt. Soon the budgeting problems will lead to a balance and a lot of credit card bills. If you cannot pay off your home equity line of credit within 3 years, you likely have too much debt and should speak with a credit counselor or a bankruptcy attorney to discuss your options.

Home Improvements

Consider spending the money on home improvements if they can add value to your home. They aren’t that many home improvements that will increase the value of your home to cover their cost. Make sure that you pay cash for half the cost and borrow the other half. This will stop you from overspending. It will also decrease your odds of having to pay interest for years on money that didn’t really benefit the value of your home. If a home equity line of credit doesn’t work for you, then consider locking in a fixed rate with a home equity loan.

Emergency Expenses

Only spend money if the cause is an actual emergency and you have spent your retirement savings. It is wise to have an emergency fund, but most families do not have the opportunity to save that much money. A home equity line of credit can help with an emergency fund that is not up to par, and also gives you the opportunity to rebuild your cash flow.

College Costs

This is an option if you can pay off the balance and still save for retirement. While students can get federal student loans with low fixed rates and repayment options, parents are eligible for Parent PLUS loans that may come with higher rates and fewer repayment options. The likelihood of forgiveness is also low. Home equity lines of credit are a reasonable alternative to looking at student and Parent PLUS loans when planning how to pay for college.

Look At Your Portfolio

You can protect your portfolio if you open a reverse mortgage line of credit during retirement. Reverse mortgages allow seniors to go into their home equity without having to pay for the debt. Many advisers look at these loans as a last resort for retirees who have run out of assets. Today, reverse mortgages are safer because of improvements to the Federal Housing Administration’s Home Equity Conversion Mortgage Program. New research has shown that reverse mortgage lines of credit offer security to retirees. Once the stock market declines, retirees can borrow from credit lines instead of portfolios, which give investments the opportunity to recover once the market rises back up. Using this strategy can help a portfolio last through retirement.