Your home equity is perhaps the most stable (and potentially largest) savings account most Americans have. That's why it's so tempting to "just borrow a little" from it from time to time.

For example, you've seen a hot tub you can't live without, but your savings account is a bit sparse and your credit cards are "maxed out"; in general, you have "too much month at the end of the money". Then it hits you--how about borrowing against your home equity? After all, it will be a home improvement, right?

Before you tap into that precious equity, ask yourself these questions:

1. Will the item's value outlive my repayment of the debt? If the answer is no, it's best to find another source of financing or wait until you can pay cash for the item;
2. Is there any other way I can finance the purchase without tapping my equity? (If you consider your equity as a last-resort resource, often you'll have second thoughts about purchasing items you really don't need in the first place.)
3. If the item is considered a home improvement, will it offset the cost I'm paying by creating added value to the property? A Realtor can give you an estimate of the value the improvement could potentially add to your property.
4. Do I need my home equity available for another purchase? (This is especially important if you'll be needing another loan soon that requires there be no other second mortgage on the property. In fact, some equity lenders require that all other equity lines of credit be paid off before making you a loan.)
5. What are the pros of getting an equity line versus refinancing my existing loan? First, you don't disturb your first mortgage (especially if it's at a competitive rate of interest) and you can often tap up to 80 percent or more of your equity. Since equity loans are not often sold in the secondary market, many loans won't require as much documentation and paperwork as refinancing the entire first mortgage does.
6. What are the risks involved with equity lines of credit? Lenders often make them without ordering a formal appraisal on the property. This could result in over-leveraging (too much loan for too little value) and could be especially harmful if you needed to sell the property quickly. Second, equity lines of credit can bear higher interest rates than refinanced loans. Sometimes they contain balloon payments and are generally not assumable should you decide to sell. In fact, most equity lines will need to be paid off if you disturb the first mortgage.

Give yourself some cooling off time before you take out an equity loan. It's best to do nothing for a time when considering tapping into your precious equity. If it's really a good move, it can wait until you've weighed all the pros and cons. Just as with other life-altering events, spending your hard-earned equity deserves proper consideration and evaluation!

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