Readers' Top Reasons for Tapping Home Equity

Have you ever tapped into your home's equity?

Over the past decade, with home prices rising and interest rates sinking to all-time lows, homeowners have increasingly turned to home equity loans and home equity lines of credit (HELOCs) as a potential source of extra cash. With their low rates and usually reasonable closing costs, plus their potentially tax-deductible interest, homeowners often see these types of loans as an affordable way to borrow money. (And, of course, they're also profitable business for lenders.)

Borrowing by using your home equity as collateral has become so ubiquitous, in fact, it may be hard to remember time a when these types of loans were not as common. But as data from the St. Louis Fed shows, home equity loans really started heating up in the lead up to the "housing bubble," jumping more than 360% from $132.2 billion in March 2001 to $611.3 at its peak in May 2009.

But despite their rise in popularity, opinions still differ as to whether and why people should borrow against their home. We recently asked Morningstar readers whether they have ever tapped into their home’s equity through a home equity loan or line of credit, or if they have taken out a reverse mortgage. Of the responses, the most frequently mentioned reason was home renovation, followed by purchasing cars. Others said that they had used the cash to pay for education, to pay off their mortgage, or to invest in other assets.

On the other hand, many respondents said that they wouldn't dream of borrowing and using their home as collateral; reader Thomas47 wrote "I have a psychological need to be debt-free." Artsdoc agreed: "I know I sound incredibly old-fashioned, but I've always thought that if you have to pay interest on something, you can't afford it."

Other readers shared a view that seemed to marry these philosophies somewhat: They revealed that they had taken out a home equity line of credit as an emergency fund, but didn't plan to draw on it unless absolutely necessary.

The following is a summary of the responses. To read the full thread and weigh in yourself, please click here.

'I opened a HELOC about 10 years ago to do some remodeling.' A common use of home equity, at least among readers such as KathieL who responded to our informal survey, is for home renovation projects. Several posters mentioned that they consider this a good use of home equity because they believe the investment in their home will ultimately enhance its value.

"Did HELOC once that I'd had for years for remodel during the downturn. Rates dirt-cheap, and that way I kept all assets working for the big uptick. Paid back quick and what little % charged was deductible. Helped big-time a few years later when house sold quickly due to all the updates," said JHAsheville.

"We used cash-out refinances to fund home improvement twice. In both cases, these refinances reduced both our cash outlay and our mortgage payments," writes carman. "When we retired and sold the home in 2005, the upgrades (a kitchen and porch conversion to full-year Florida room) were repaid with interest by the enhanced value of the home. This made it possible to buy a similar sized home in a cheaper area and still put some money aside in our rainy-day bucket."

"In 2008 we got a prime + .25% HELOC to cover major, major renovations to our antique property here in New England. New insulation, modern windows, doors, new roof, and on-demand hot water system. The resulting higher efficiency has, over the years, offset a third of the total cost of the improvements as our usage of propane, electricity, and firewood have decreased dramatically," said wolverine. "Utilizing the HELOC to prop up these sorts of expenses, we have been able to cut way back on monthly utility expenses and contribute fully to savings, retirement, emergency savings, etc."

'Have a 2.25% HELOC and use it for the cars.' Other respondents (such as TinyTuna, quoted above) said they used their home equity to fund big-ticket purchases or other large expenses because the terms of home-equity loans and HELOCS can be better than other types of loans, such as auto loans or credit cards. In fact, a few readers said they have used them to pay off a mortgage at a lower interest rate. Some readers mentioned that using their home equity loans for big cash outlays allowed them to avoid selling stock at what they considered to be the wrong time.

"Several times I have used it to buy large-ticket items like cars," writes thebug. Likewise, GeoLesCarl writes, "On a few occasions, we have had a large financial obligation, e.g., a new car, an assessment for an improvement, or repair to our condo building, etc. These obligations are more than we can pay off out of idle cash."

"I used a home equity line of credit to purchase a car.... Lower interest, lower payments," writes DBCooper.

"We opted for a HELOC only once, and that was years ago. The reason that we opted for the HELOC was an unusually large bill from the IRS at tax time. The HELOC was the cheaper way to pay that bill and we paid it off rather quickly," said seaside1.

Anoobie said: "We paid off the last $55,000 of our 15-year mortgage with a home equity loan. We dropped our interest rate from 5.25% to 3.62% with no fees."

'Put two kids through University of Florida on a home equity loan.' Some readers have used their home equity to foot the pricey bill for higher education, such as bubbygator, quoted above. "Took a while to get everything paid off, but it was sure worth it! One is now a science teacher, and the other is a lawyer," this reader said.

Johnschmitz said: "Used a no-closing 2.5% HELOC to pay for school for a career change. Still have it and have paid down half the principal, but not in a hurry to pay down the rest."

"We used the home equity line of credit to pay for our kids' college and post-college education, new cars (though I must add we keep our cars for a long, long time) etc.," writes MSReader.

"Our two oldest kids finished their degrees, got jobs, and started paying their PLUS loans, one at 8.2%, the other at 7.2%, to be paid off over 30 years at about $500 a month," said terryh. "We paid off the last little bit of our mortgage and took out a new mortgage at 2.875%, which had the same monthly payment at 15 years, and paid off the PLUS loan. We keep our own records, and the kids are paying down their loans at a much faster clip than the PLUS loan would have been paid."

'...There are no margin calls with HELOCS, regardless of asset price changes.' A few readers, such as retired at 48, said they used their home equity to invest in an asset that could potentially yield more than the interest rate on the loan.

"I have invested a lot of the HELOC money in higher-yielding assets, such as: leveraged closed-end fixed-income funds distributing about 10% now; high-yield junk bond funds; MLPs at about 6% yield... This income is used to pay the HELOC interest. Do the math. I expect total return to exceed HELOC interest paid over time," said retired at 48.

"One time ... BB+T stock was so cheap I took out $100,000 @ 2.3% to buy stock that was paying a 12.5% dividend," writes thebug. "Would not suggest using these funds unless you have other means of paying it off if things happen," this reader added.

'I just did. not. want. debt. period.' This sentiment, expressed by rforno, was echoed by several posters. While a few respondents in this camp added the stipulation that they thought it would be OK to borrow home equity in the case of an emergency, many readers said their desire to be debt-free in retirement or "to sleep well at night" (in the words of win1177) steered them clear from home equity loans and HELOCs in most cases. A few readers pointed out the risk that if the value of your home declines and you've borrowed more than it's worth, you could potentially find yourself in a position of being underwater, with your home as collateral.

"HELOCs are great as an extra 'cushion' for an emergency fund, especially when you view the relatively low rates and tax deductability, but I just prefer to avoid debt," said win1177.

"I have a psychological need to be debt-free, said Tomas47. "...That said, I do have a large home equity line of credit (HELOC) established as an emergency source of cash if ever needed. At the time, it was available on a no-fee basis, and it allows me to hold less cash in our emergency fund."

"HELOCs can be dangerous," cautions revell10306. "They are a revolving line of credit not a mortgage; they can detach from the property and come after you personally... I know; it happened to me."

"I do not view a house as an investment. You have to live somewhere. One of the best ways to live well in retirement is to reduce your cash outlays. My wife and I made extra payments to make sure our mortgage was paid off when we retired," said Mustang. "It would have to be a dire emergency before we would borrow against it."