Watching Your Wallet: Pros and cons of tapping into home equity

FRESNO, Calif. (KFSN) -- The price of just about everything from groceries to gas is on the rise.

New data from the Labor Department shows the worst inflation report in nearly three years, rising to 3.8 percent.

"People are using the traditional debt methods to get cash to pay for their living, which, in the end of the day, you still have to pay back that debt," says Splitero CEO Michael Gifford. "Those monthly payments are adding up, and a lot of people are stressed about it."

Gifford says homeowners should explore all of their options. One avenue that is an alternative to high interest personal loans is tapping into your home equity.

"When someone is thinking about using the equity in their house, first of all, they need to assess their own situation to make sure that they can adequately do so, and then look at all the available products," he said. "With the environment in the economy today, most people don't want another monthly payment."

Common products include a Home Equity Loan, Cash-out Refinance, Home Equity Investment or Home Equity Line of Credit.

"If they're using a HELOC to invest in another property or another business, it can ensure that their interest rates are very low," says Financial therapist and CEO of The Academy of Financial Education, Samuel Molina. "Instead of getting a personal loan at 9% or 15%, they can use a HELOC to start a business and they're looking at 5% or 6%.

Molina says it's important for families to realize credit card debt is unsecured debt.

"Once you roll over unsecured credit card debt into your house by taking out a home equity line of credit, it now becomes secure debt and you can no longer discharge it, which means you are going to attach it to your house and you are going to be responsible for that payment until the house is paid off," he said.

When it comes to best practices, avoid using home equity for non-essential spending.

It's always important to weigh the risks and consult with a financial professional. Using your home as collateral can lead to foreclosure if you can't repay.

"You just have to make sure that you have a plan in place to pay off the mortgage, and then also the additional home equity line of credit you've taken on," Molina said.

You also want to make sure to not rely solely on home equity. Experts say always keep a separate emergency fund.

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