What you should never buy with home equity
Strong home price appreciation over the last few years has many American homeowners sitting on additional home equity.
It can be tempting to tap your home equity for any number of purposes - from making major home improvements to paying your kid's college tuition. Some experts say that cashing in on home equity for such purposes can be a wise investment.
But there are also a host of purchases you might consider funding with home equity that fall into the realm of financial no-nos.
Here are four things you should never buy with home equity:
No. 1: Wedding expenses
According to The Knot, the cost of the average U.S. wedding now tops $28,000. With a slew of expenses and professionals to pay for – such as caterers, musicians, a photographer or videographer - it's easy to see how couples, or their parents, might lean on using a home equity loan or home equity line of credit to cover all the costs.
"But even if it's a wedding, people need to make sacrifices and establish priorities," says Jordan Niefeld, a Certified Financial Advisor and CPA at Raymond James & Associates in Aventura, Florida.
Besides, a wedding is a one-day affair; it's the marriage that a couple should be investing time, money and effort. So scale back on a wedding celebration rather than tap home equity to pay for an over-the-top bridal gown, an expensive banquet hall or a honeymoon in an exotic destination.
No. 2: A ‘guaranteed’ stock or bond market investment
Even though there's no such thing as a "guaranteed" return on Wall Street, that doesn't stop stockbrokers, friends, colleagues and others from pitching you investments that are supposedly a "sure thing."
However, if you don't have the cash to buy stocks, bonds or mutual funds, "I feel very strongly that it's risky to utilize home equity for investments," says Donna Skeels Cygan, a CFP and President of Sage Future Financial, LLC in Albuquerque, New Mexico.
No one has control over the vagaries of the stock market and the money you put up could be gone forever - but if you used home equity for an investment, you'd still have a bigger house note to pay.
And consumers with home equity lines of credit that are nearing the repayment phase, known as the "end of draw," are much more likely than other borrowers to go delinquent - not just on their HELOCs, but also on their primary mortgages and other debts owed, according to a study from Experian.
Related: Calculate and Estimate Your Home Equity
No. 3: Normal monthly expenses
Accessing your home equity doesn't always mean getting a one-time lump sum, as is the case when you obtain a home equity loan. You can also have a home equity line of credit, which allows you to gradually draw down on your home equity anytime you'd like simply by using bank-issued checks linked to your home equity.
But beware of repeatedly eating away at your home's equity by constantly writing home equity checks just to cover your normal household expenses, such as grocery costs, utilities or transportation bills.
"We all pay toward our mortgage every month, and our home is our safety net," says Cygan. "So home equity should never be tapped for anything frivolous, normal or routine."
If you need to use home equity for recurring bills, it's a sure sign that you're living beyond your means and are in a danger zone when it comes to managing your financial obligations and controlling debt.
No. 4: Gifts of any kind
There are dozens of holidays throughout the year, from New Year's and Valentine's Day to Christmas and Hanukkah, and everything in between. Any one of these holidays or other special occasions might beckon you to spend money on pricey gifts for others.
But buying big-ticket gift items for relatives (or others) is an imprudent use of home equity, since your spending during these times is bound to be emotionally-charged, causing you to overspend unnecessarily. When you spend with your heart instead of using your head, and you add the lure of having substantial home equity to tap, you're bound to go overboard.
"If it's more of an impulse purchase or if it's something that you really don't need, says Niefeld, "these are all bad reasons to take home equity -- or any type of loan."
"Home equity is a very sacred thing," he adds. "You don't want to tap that for just anything,"
No 5. Assets that depreciate
While you may be tempted to use the equity in your home to buy things such as a car, a boat or a high-end television, you may want to reconsider. Taking equity out of your home -- usually an appreciating asset -- and putting it into a boat, car or TV (usually depreciating assets_ really doesn't make good fiscal sense. Not only is the cost of the item increased due to interest cost, but the declining nature of the asset's value means that you probably won't be able to recover the money you borrowed if you were to sell the item. In some cases, given the long-term nature of equity loans and lines of credit, you could wind up making payments after you no longer own or use the item.
In addition to all this, it's also useful to remember that since the Tax Cuts and Jobs Act of 2017, interest paid on home equity debt is no longer tax deductible unless the proceeds are used to "buy, build or substantially improve" a primary or secondary residence, and none of the above meet this criteria.
This article was updated by Keith Gumbinger.