When people look at the pros and cons of homebuying versus renting, they typically focus on costs, repairs and commitment. Although all of these are valid points in the decision-making process, it is important also to focus on building equity in your home and how this equity can be your safety net or a cheaper form for financing.

So what is equity? It is the home value you unlock as you pay down the price. It is a combination of the down payment you paid when you bought your home, any additional payments that went against the principal of your loan coupled with the appreciation of your home value.

The equity you have in your house can be accessed even before you pay off the loan and can sell the house. Many banks will lend you money against this equity either in the form of line of credit or a lump sum. These equity loans typically carry a lower interest rate than a personal loan or a credit card, which means your cost to repay the money is lower and probably can be stretched over a longer repayment period than a personal loan.

With that in mind, it is important to think twice before using the equity in your home. Keep the following points in mind.

Priorities

The equity you build in your home is a significant asset. It could help you afford a bigger home down the road, refinance your home loan at a cheaper rate or use it for emergencies. So before you dip into your equity to finance a trip or a luxury car, think of how important this expense is.

Many people also use this equity to pay off other debts, like credit cards or personal loans. Although this is a good move to consolidate your debts, make sure you will have the discipline not to rack more debts on your credit cards.

In short, take your home equity very seriously. It is something you build over time, and it can be a significant amount of money that can help you achieve bigger and important goals. In addition, this equity is your way also to pay for expensive home upkeep. Do you need to replace plumbing, remodel the kitchen or fix the roof? Using home equity to do so is smart, because your will get the return on your investment in terms of higher home value.

Market conditions

Although real estate markets have been stable and thriving, know the circumstances of where you’re buying. Taking a home-equity loan along with your mortgage can be risky if your equity is mostly built through home value appreciation. If the market drops and your home loses a significant portion of its value, then you may end up underwater on your loans.

Although that is unlikely in a healthy market, it is something to keep in mind if you’ve not paid much of your home mortgage. Don’t rush to tap into your equity unless you have to or you have paid down a significant amount of your principal. Remember, in the first few years of paying off any home mortgage, your payments go against the interest.

Alternatives

Although home equity come at a cheaper rate than personal loans, always check for other financing option. If you’re renovating the kitchen, check if your provider would offer you an interest-free or low-interest financing. These financing options are typically on shorter terms. So if you can afford them, keep your home equity intact for something that is more critical or for which you cannot get financing.

When you consider alternatives, pay close attention to any associated fees, charges or penalties. For example, you might use a credit card to finance something over a shorter period of time, but the interest rates might be much higher, and if you default the costs will be staggering.

The writer, a former Gulf News Business Features Editor, is a Seattle-based editor.

To use home equity or not

It could be a cheaper financing option

Don’t deplete all your equity

Consider alternatives and costs

— R.O.