Smart Ways to Use Your Home Equity

There are smart ways to use your home equity, and there are foolish ways. While it's tempting to view the money you have already put down against the principal of your house as a savings account, be aware that if you fail to budget effectively and over draw your equity. You could lose your house, wind up in credit trouble, or even have to file for bankruptcy.

Thus, it's generally unadvisable to use equity money to pay for frivolous vacations or to spend beyond your means -- make your monthly payments and your budget before going crazy with your equity money.

Here are some intelligent ways to use your money accrued to further your future. You can take a low interest loan against your equity to generate the capital necessary to start your own business. Just be sure that you have a sound business plan in mind and that you have other safety cushions in place.

For instance, you might have a “day job” -- or reliable first income stream -- to protect you against cash problems and give you the mobility you need to get your business off the ground.

Another way to go is to finance your child's education or develop a retirement portfolio using some equity money. Alternatively, you can dip into your equity to generate funds for home improvement. Home improvement project can be a double win for you. Not only can you enjoy better, more comfortable living, but you can also improve the resale value of your home. Remember that not all home improvement projects will contribute equally to your home's resale value.

A redone basement, for instance, is generally not as valuable to buyers as a modernized kitchen. If you go the extra mile to install eco-friendly windows and heating and cooling units in your house, you may qualify for certain deductions. You can also use your equity money to consolidate your credit debt and sock away cash for emergencies.

By paying off creditors, you can improve your FICO score and potentially qualify for a lower refinancing rate. To make the most out of this process, know your interest rates -- for both savings and debts -- and have your accountant help you with the calculations. With so many rate variables in play, it's easy to get confused about how to consolidate, how to pick the right term for your home equity loan, and how much to allocate to savings and how much to allocate to payments.