You can but there a lot of factors to consider. First you might ask why you are borrowing on equity you don’t have. If you are hoping to pay off high interest credit card debt, it might make sense to consolidate your payments.
The interest rates on home equity loans are generally lower than credit card interest. If you’ve spent too much on your credit cards once, you’ll probably do it again and your house isn’t an endless source of cash. Paying off credit cards with a home equity loan only makes sense if you address the root of the problem, your spending habits.
Another reason for borrowing more than your home is worth is to fund a home improvement project. Some home improvements can increase the value of your home. If borrow money to pay a contractor and that contractor doesn’t perform adequately you are still liable for the debt. Make sure that you are dealing with reliable and reputable firms when you take on any big projects.
Some people look at a home equity loan as a way to reduce their tax burden by turning non-deductible interest into tax detectable interest. For example if you take out an auto loan, the interest is not deductible but if you take out a home equity loan and use the money to buy a car, the interest may be deductible. However, if you borrow more than the value of your home the loan is considered unsecured and the interest is not deductible.
Sometimes it makes sense to take out a big loan when you believe the housing market in the area will cover the equity gap. If you think that you can sell the house for more than you paid you can use the bank’s money to gamble on the real estate market. This assumes that the market will continue to rise.
For a young people who haven’t been in the job market long enough to put together a down payment, a large loan can put them in a house faster. If the real estate market in the area continues to increase, the equity gain can wipe out any of the disadvantages from higher interest rates.
Generally interest rates are higher on loans for more than the value of house. This is because lenders are taking on more risk. If you default on the loan, they won’t be able to cover their losses by selling the property.
Never sign on for a loan that you haven’t researched. Make sure you’re getting the best deal possible by contacting several lenders. Also, investigate other types of loans because when you sign a home equity loan, you’re putting your house up as collateral and you could be forced into foreclosure.
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