The best way to describe home equity is the amount you have paid toward your mortgage. Every month you pay, you begin to build more equity in your home. It’s possible to then use this equity to acquire a loan from your bank. But how do you know what to use the money for, or even if you should take out the loan?
The number one rule is to use a home equity loan for things you suspect will appreciate in value or generate revenue. For example, training or education makes you more effective in the workplace, and may increase your salary in the long run. Buying rental real estate to become a landlord may increase your income. Smart home improvements can increase the value of your home. These long term investments could potentially make you more money than you spent.
Unwise purchases include clothing, most vehicles, or any frivolous purchases. These aren’t investments which will help your financial situation in the long run. If you use equity for purchases that do not increase in value, you may put yourself in a tight spot. It might be best to hold off on a loan against your equity if you don’t have breathing room to take a potential loss.