Should you dip into home equity?

It all comes down to responsible borrowing. Here are common home equity cash-out scenarios and whether they make sense for you.

The up side is clear if you bought a home you don’t completely love and want to remodel, said Justin Lopatin, vice president of mortgage lending for PERL Mortgage in Chicago.

The opportunity is especially attractive if your home has risen in value so you have a larger equity cushion.

“You can leverage that equity at a low rate to improve your home and make it more comfortable,” Lopatin said.

Home equity can be used to invest for a higher return as long as interest rates remain low, Lopatin said.

However, this is a risky undertaking since the stock market has a reputation for crashing at times.

Alan Moore, co-founder of XY Planning Network in Bozeman, Montana, said home equity can be a good source of funds to start a business or further your education, but he said that an objective adviser should be consulted to ensure that your investment is sound.

A HELOC or home equity loan can be an attractive way to finance a child’s education because the interest rate might be lower and the maximum loan amount higher than some other types of education financing, said Andy Tilp, president of Trillium Valley Financial Planning in Sherwood, Oregon.

“I’ve seen parents struggle because they have to delay retirement, sometimes for many years, because of this huge debt.

“And if they lose their home, and with a bit of an ironic twist, they may be moving in with their new college grad,” Tilp said.

Moore said parents shouldn’t sacrifice their own financial well-being.

Some retirees use a HELOC to meet their cur- rent income needs in years when their investment returns aren’t sufficient for that purpose, Tilp said.

“If their investment returns don’t pick up, they’ll need to cut back elsewhere or borrow more against the line of credit, which can start a dangerous downward spiral,” Tilp said.

Paying off car loans, credit cards or other personal debt is another popular use of a home equity loan, HELOC or cash-out refinance.

“But that doesn’t cure the problem of credit card debt,” Moore said.

Emergency fund

A HELOC, or home equity loan, can be a handy alternative to keeping a large sum of money in a low-rate bank account for emergency savings.

However, “If someone has an emergency and taps the money, but then loses their income and then is in default, they’ve put their home at risk,” Tilp said.

“When (a HELOC) is very easily accessible and the interest rate looks good, it can maybe be too easy,” he said. “By having it, you’re more likely to use it, which is the good and the bad.”