Cashing out home equity is a popular way for homeowners to pay for life’s little extras.

But it may too popular – debt on home-equity loans has increased dramatically in the last few years. In 1999, Americans owed $267 billion on home-equity loans. By 2004, that number was up to $719 billion.

Home Equity Gives You Options – If You’re Careful

In the short term, cashing out home equity gives you more access to money to pay for the things you want – home improvements, cars, educations, and vacations. But homeowners often forget the most important thing about debt: it has to be paid back. And with home-equity debt, it’s not just your credit rating that’s on the line – it’s your home.

What’s the best way to get the most from your home equity without getting into trouble? Here are three ways you can be smart with your home equity.

1. Consider What You’ll Get For Your Money

Ask yourself: why do I need to spend this money? Some investments make more sense for home equity cash-out than others. Many people use home equity to pay for education – potentially a very wise investment. Cashing out home equity to finance home improvements can also be a smart investment. Improving your home can increase the amount your home is worth – which increases your home equity.

It’s more risky to spend your home equity on things that don’t return any financial value – vacations, for example. And cashing out equity to pay for a new car can be a bad idea – there’s a good chance you’ll still be making payments on the home equity loan long after the car is gone.

2. Don’t tap into all your equity

When you get a home equity loan, you’re borrowing against your house. The more equity you cash out of your house, the less of the house you own. If you can’t pay the loan back, you could lose your home.

For this reason, you shouldn’t cash out all of your home’s equity. Most financial experts recommend keeping at least 20% equity in your home. This gives you a source of money for emergencies, such as losing your job or having a serious medical problem.

3. Compare Before You Buy

Like any loan, it pays to shop around. Talk to as many sources as possible. Get advice from financial professionals before you start seriously talking about cashing out your home’s equity.

You can also find plenty of information on the internet. There are lots of financial experts writing online – and most of their advice can be had for free. You can also get free quotes from independent mortgage brokers. Mortgage brokers work with several lenders. You can get more loan options – and often a better rate – working with an independent broker than with a single lender.

Cashing out home equity is a great way to make the most of your home’s value. But before you sign that loan, make sure you’ve thought it through. Careful planning not only helps you get a better deal on your home equity loan – it helps you ensure your future as a successful homeowner.