Thinking of using your home equity? Do this first

If you're a homeowner, you may have considered tapping into your home's equity to finance a major expense like home renovations, college tuition or to consolidate debt. Home equity loans and home equity lines of credit (HELOCs) can be a great way to access funds, but it's important to do your research to ensure you do so wisely.

In this article, we'll discuss some things you should do before borrowing against your home to help you make a more informed decision.

Start by checking out today's home equity rates to see how much you could borrow.

Thinking of using your home equity? Do this first

To make sure home equity borrowing works best for you, do the following first.

Evaluate your financial situation

Before tapping into your home equity, it's important to understand your overall financial situation. Home equity loans and HELOCs have certain requirements you must meet to borrow money. By comparing your current situation to these requirements, you can determine if you're likely to qualify — and takes steps to improve your situation if necessary.

Specifically, take a look at:

• How much equity you have: You can calculate your home equity by subtracting your current mortgage balance from your home's market value. Ideally, you should have at least 15% to 20% equity in your home (which you can calculate by dividing your equity amount by your home's current market value, then multiplying the result by 100). If your equity is low, consider ways to increase it.
• Your credit score: Most lenders want to see a credit score in the mid-to-high 600s, but you'll qualify for the best rates with a score of 700 or higher. If yours is low, you can boost it in multiple ways.
• Your debt-to-income ratio: List all of your current debts — including credit cards, auto loans and student loans — and divide the total by your monthly income. Then, multiply the result by 100 to get a percentage. If the result is higher than 43% to 50%, lenders will likely reject your application. You'll want to pay down your debts or boost your income to be more likely to qualify.

It's worth noting that if you fall short of these requirements, it could be a sign you're not in a strong enough financial position to benefit from using your home equity. You may still be eligible, but you may get a higher interest rate, a lower borrowing amount or have difficulty paying the money back. So, make sure your finances are strong before you move on to the next steps.

Identify how much you can afford

Home equity loans and HELOCs are secured by collateral, and that collateral is your house. If you're unable to keep up with payments, you could lose your home. Because of this, it's critical to assess your ability to repay the loan without straining your budget.

Factor in your monthly payments, interest rates and any fees and closing costs associated with the loan. Ask yourself whether you'll be able to afford the loan if something unexpected arises, such as job loss or illness. Make sure you have a solid plan in place before you start borrowing, and only take out what you're confident you can repay.

View current home equity rates here to see how much you could borrow.

Shop around

Once you've determined you're ready to tap into your equity, shop around for lenders. Home equity loan and HELOC interest rates and fees vary widely, so take the time to research top home equity loans and HELOCs, getting estimates from at least three lenders to compare interest rates, fees and terms.

The bottom line

Using your home's equity can be a smart way to finance expenses, but it's important to take the necessary steps to make sure you're doing so in a way that will best benefit you.

Before borrowing against your home, carefully consider your financial situation, assess your ability to repay the loan and take the time to shop around. By doing so, you'll be better poised to make a decision that works for you.