When money is tight, tapping your equity in your home – so often our major asset – can seem a fast way to make money. But is a home equity loan for you? Is it the best way to make some money when you need money now? We checked with an expert to find out. Karen Carlson is the Director of Education and Creative Programs for¨ InCharge Education Foundation, a nonprofit organization dedicated to¨ financial literacy. "We are the emergency room for finances. We help people who have overwhelming credit card debt, or are facing foreclosure or bankruptcy." Carlson says.
Home Equity Loan: Stupid or Smart?
The traditional route to using your house as a piggy bank is a home equity loan. "People say you can't really get those anymore with declining home values. But the truth is, yes you can sometimes, depending on the equity you have in your home and the stability of the housing market. Lenders are relaxing their standards again after tightening them up from 2008-2010," Carlson says.
So it may be possible, but is it the wisest choice? "We want people to ask themselves a simple question: Do I need this money or do I want this money? Need the money situations include medical bills or repairs for the home. Wants are things like remodeling the kitchen, buying a new car or going on vacation."
One typical mistake people make is justifying a home equity loan to make home improvements, believing they'll recoup the expense when they sell. "For midlifers especially, that's a common reason people give. In fact, you don't get the money back," Carlson says.
People also take home equity loans to borrow money for their kids' educaiton. Again, Carlson says this is not generally recommended. "You only have so much time to pay off your mortgage and shore up your finances for retirement. Hopefully the kids can pay back their own loans once they graduate."
"The statistics are frightening. A large percentage of people don't have much net worth at midlife. At the end of the day, the goal of work is to be able to create stability for when you can't work anymore. When you're in your fifties, there's not a lot of time left to recover from these debts."
If you do consider a home equity loan, Carlson recommends spending some time on a real estate website. "You don't need to pay an appraiser hundreds of dollars to assess your equity. You can check recent sales in your neighborhood on a site like Zillow."
Surprising Ways to Make Some Money From Your House
"We are increasingly a nation of singles. There are more single homeowners living in three-bedroom homes. That's a lot of space. If money is tight, you're just one Craigslist posting away from increasing your income by $300-$700 a month. You can split cable and utilities to save another $200 to $400 a month," Carlson says. If you're nervous about taking in a roommate, she suggests looking at it short term, say a year, and using the money to pay down a debt or save for something you really want. If all goes well, you can extend the arrangement.
Another fast way to make money can be to create a home-based business. One of Carlson's colleagues, Mark Hoewing, has done just that. "About four years ago, my significant other lost her job as a food service manager. She's originally from Columbia where she was director of a school," Hoewing says. "She wanted to teach again and decided to open a daycare. We took a home equity loan for $50,000, planning to pay it off over ten years. We built a beautiful daycare center in the garage with a playground, all to Department of Children and Families code. While she studied for a year and a half, we bought toys and children's furniture for pennies at estate sales." They got clients by advertising on Google maps and mailing brochures in the development where they live. The daycare has been open 18 months, and the couple has already paid down all but $10,000 of the home equity loan, and they plan to be debt free by year three. Got clients advertising on Google maps. Mailed within our development.
For others who go this route, Howeing has this advice: go into it with a plan, including marketing. Make sure it's something you really love doing, and that your product or service is really needed by the consumer. In a downtrending economy, this is particularly critical.
Carlson encourages to think out of the box in devising other ways owning a home can make some money. "Say you only use half of your garage. People might pay you to use the other half to house a collector car. Websites like Craigslist show you what people need and what they're willing to pay."
For more information: There's more about home equity and the financial literacy work Karen Carlson does at In Charge.
