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Be cautious when tapping in to home equity

Financial data provider Black Knight reports that Americans are sitting on nearly $6 billion in home equity value. Though those assets are obviously impressive, more people are making poor choices when it comes to how – and if – to spend their home equity.

Ideally, home equity loans and lines of credit should only be used to capitalize home improvements or to pay for emergency expenses. What they shouldn’t be used for are debts that should ideally be paid off in a relatively short time, like vehicles, credit card consolidation, expensive vacations or other similar expenses. This is because home equity loans (HELOs) and home equity lines of credit (HELOCs) are amortized over a period of years, usually between 10 and 20.

These funds also shouldn’t be used to pay down debt in an attempt to avoid bankruptcy. Doing so could result in the loss of the home altogether if a foreclosure proceeding takes place before the bankruptcy is filed.

It’s important to remember that a bankruptcy proceeding will often prevent foreclosure and can also discharge unsecured debt like credit cards and medical bills. However, if you want to keep your house, you will have to repay debt incurred via a HELO or HELOC. You must also continue to pay your original mortgage to keep your home in either a Chapter 7 or a Chapter 13 bankruptcy proceeding.

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