A home equity loan is generally not a good idea for financing depreciating assets, luxury, or discretionary spending, as it puts your home at risk for items that offer no long-term financial return. Top, unwise uses include funding vacations, buying cars, paying for weddings, or covering daily living expenses.
Home equity loan funds should not be used for depreciating assets or lifestyle expenses like vacations, luxury cars, or weddings, as these don't build equity and risk foreclosure if payments fail; instead, use them for appreciating assets or large, planned investments like home improvements, education, or debt consolidation to increase your home's value or financial stability.
Your credit score can drop: Finally, opening a home equity loan can also affect your credit score. Your score is made up of several factors, including how much of your available credit you're using — a large home equity loan can negatively impact your score by increasing the amount of available credit you've utilized.
Unlike some loans that can only be used for a specific purpose, like student loans or auto loans, HELOC funds can be used for almost anything. That said, the smartest uses tend to focus on increasing the long-term value of your home or improving your financial stability.
Did you know you can use a home equity loan to buy a car? A home equity loan lets you borrow money using the value you've built up in your home. People often use it for big expenses like home repairs—but you can also use it to buy a car. There are pros and cons to this.
Although you can borrow money against your house to buy a car, it's usually not recommended. Using your home equity for an auto loan typically costs more in interest and could put your home at risk if you can't make the payments.
The best way to access home equity depends on your needs: a Home Equity Loan gives a lump sum with fixed payments for large, one-time costs; a HELOC (Home Equity Line of Credit) offers a flexible, revolving credit line (like a credit card) for ongoing expenses, with variable rates; and a Cash-Out Refinance replaces your mortgage with a larger one, giving cash but potentially resetting your interest rate and terms. For non-debt options, Home Equity Investments (HEIs) provide cash for a share of future appreciation, while a Sale-Leaseback lets you sell the home but keep living in it.
Ramsey says he would never recommend a home equity loan or line of credit. While Ramsey acknowledges some potential benefits, he believes the risks—including putting your home at stake—far outweigh any advantages.
HEI providers tend to be more flexible with credit scores, income verification, and debt-to-income ratios compared to traditional lenders. This makes it a viable option for homeowners who are self-employed, have recently gone through hardship, or do not qualify for conventional financing.
Taking equity out of your home can be a smart financial move for major, value-adding expenses like renovations or education, offering lower rates than credit cards, but it's risky and best avoided for discretionary spending due to the danger of foreclosure if you can't repay the loan, making it crucial to weigh the benefits against the risk of turning your home into debt.
Home equity loan funds should not be used for depreciating assets or lifestyle expenses like vacations, luxury cars, or weddings, as these don't build equity and risk foreclosure if payments fail; instead, use them for appreciating assets or large, planned investments like home improvements, education, or debt consolidation to increase your home's value or financial stability.
The 3-7-3 Rule in mortgages isn't a loan type but a federal timeline from the TILA-RESPA Integrated Disclosure (TRID) rule, ensuring borrower protection by mandating disclosures within 3 business days of application, a 7-business-day wait between the initial Loan Estimate and closing, and another 3-day wait if significant changes (like APR) occur, giving borrowers time to review costs before committing to a loan.
8 alternatives to HELOCS: At a glance
A cash-out refinance is a better option if, after doing a blended rate calculation, you determine that you can get a lower rate by refinancing your first mortgage and then taking out an additional home equity loan. A personal loan doesn't rely on any collateral.
Using your home equity to borrow money can often be a better option than a 401(k) loan because it doesn't negatively affect your retirement savings. You can also change jobs without being required to quickly repay the loan.
A $100,000 home equity loan payment varies significantly but typically ranges from around $970 to $1,250 monthly for a 15-year term, and about $1,230 to $1,250 monthly for a 10-year term, depending heavily on your interest rate (e.g., 8.3% to 8.57%) and the loan term, with shorter terms meaning higher payments but less total interest. A HELOC (Home Equity Line of Credit) often starts with lower, interest-only payments during a "draw period," then shifts to principal and interest payments later, notes LendingTree and Citizens Bank.
The main "2 rule" for refinancing is getting your interest rate at least 2 percentage points lower, but other key considerations include calculating your break-even point (how long to recoup closing costs) and your reason for refinancing (lower payments vs. shorter term). A significant rate drop (like 2%) usually makes refinancing worthwhile if you stay long enough, but even smaller drops can save you money over time, especially with high loan amounts or long stays.
The 20/3/8 rule is a car-buying guideline suggesting you put 20% down, finance for 3 years or less, and keep your total monthly car expenses to 8% or less of your gross income, helping to ensure you buy reliable transportation without overspending and can still invest in other goals like retirement. It's a tool to avoid being "underwater" on your loan (owing more than the car's worth) and to prioritize financial health over luxury vehicles.