- Home equity loans and lines of credit are increasingly attractive as home values rise.
- More than 4 out of 10 homeowners would use this loan to consolidate debt, while 15 percent of believe they can tap this line of credit to pay household bills.
- If you’re using this loan or line of credit for something other than improving your home, you can’t take a write-off on your taxes.
You shouldn't use your house to help pay your monthly bills, but nearly 1 in 6 American homeowners thinks that's just fine.
Those were the findings from a recent survey by Bankrate.com. Earlier this month, the personal finance website took an online poll of 719 homeowners, asking them about using their home equity — the market value of your abode minus the outstanding loan you have on your dwelling.
Though nearly 75 percent of participants said that improvements and repairs were "good uses" of home equity loans and lines of credit, many felt that they could tap value of their house for a range of other uses.
For instance, about 15 percent of the participants said that paying regular household bills was also a "good use" of home equity — a potential signal of financial distress.
"It's a reflection that money is tight," said Greg McBride, chief financial analyst at Bankrate.com. "Home equity is often viewed as found money during times of financial strain."
Here's what you need to know about tapping your home's value and the right way to do it.
Two drivers determine the amount of equity you have in your abode: The amount of principal you've paid off on your mortgage and the increase in your home's market value.
Used responsibly, a home equity line of credit (HELOC) can provide you with access to cash at a competitive interest rate. For instance, interest rates on HELOCs are at about 6.08 percent, according to McBride.
You don't have to go with the lender that provided you with your mortgage. Instead, shop around for a competitive interest rate on a HELOC.
While these loans could also act as a cash backstop in a pinch, borrowers should be aware that there's a right way and a wrong way to use them.
About 44 percent of the participants in Bankrate.com's survey said that debt consolidation would be a "good use" of home equity, while 3 in 10 were just fine with tapping their home's value to cover tuition and other educational costs.
You should know that under the Tax Cuts and Jobs Act, you can only deduct the interest on the debt if you used your HELOC or home equity loan to buy, build or substantially improve the home that secured the loan.
Starting this year, you can only deduct interest on $750,000 of qualified residence loans, including your mortgage and HELOC.
If you're using your HELOC or home equity loan to pay off your consumer debt or to pay down a student loan, you might be able to pay off the liability faster, but you won't be able to deduct the interest on your taxes.
"It can be a savvy way to accelerate your debt repayment and minimize interest charges for disciplined homeowners," said McBride.
Here's what you should know if you're thinking of borrowing against your house.
Know your costs: Tapping your equity comes with a price. Keep an eye out for minimum draw requirements on your HELOC, lender fees and other expenses, as well as introductory interest rates that may go up.
Mind your spending: You need to be certain that you can afford to repay your loan. If you're borrowing to clean up your credit card debt, take a second look at your spending habits.
"If the debt has resulted from living beyond your means, not budgeting and overspending, then those things need to be fixed first," said McBride.
Back up your emergency funds: Your home could offer you with a source of cash, but it's no replacement for an actual emergency fund. Keep enough liquid cash that you can afford to cover at least three to six months' worth of expenses.