Five Big Borrowing Mistakes

There is an array of good reasons to tap into your home equity for cash, but it's not always a good idea. Here are some tips on how to avoid five big home equity borrowing mistakes.

1. Using home equity for investments. Most financial experts advise against using cash out home equity finance for investment purposes. You're almost always better off using money you already have to invest. You don't want to tap into home equity unless you're certain of a solid ROI. One exception to the no-investment rule is starting your own business. If you've carefully planned out your strategy and have a solid idea of what your ROI will be, cash out refinancing is one way to use debt to generate wealth.
2. Do It for the Tax Breaks. It makes no sense whatsoever to take out a cash out home equity finance loan solely for the tax deduction. This is analogous to paying someone a dollar and getting back 30 cents-it's just not financially sound. Tax breaks should always be a secondary or tertiary motivation for cash out refinancing. You should also talk with your tax advisor before you make any rash decisions based on tax advantages.
3. Consolidating debt. For the most part, cash out home equity finance loans used for debt consolidation without accompanying lifestyle changes are a disaster. If you get behind on your credit card payments, you might hurt your credit rating, but you won't lose your home. The stakes are higher with cash out refinancing loans.
4. Making your wishes come true. Don't use cash out home equity finance to make your wish list a reality. Buying boats, expensive cars, etc. will create negative wealth and will probably be worth zilch by the time you pay off the refinancing loan. A better rule to live by is that if you want something, save for it. Using cash you've already earned is a much wiser strategy than borrowing.
5. Choosing the wrong loan. Try to avoid cash out home equity finance loans that are interest-only or balloon loans. These loans are geared toward borrowers that want more cash than their home is worth, which is a dangerous situation.

These are mistakes to learn from so they don't happen to you. Also be sure to read through the guidelines on how to spend equity wisely.