Home prices are up and, as a result, millions of people are borrowing against their equity they’ve built up in their home since the housing crisis. In fact, Freddie Mac says 41 percent of consumers took out mortgages in the second quarter of this year that involved some form of cash-out refinance. At Sotheby’s Phoenix, nationally, homeowners borrowed more than $13 billion from their home equity between April and June. That’s up $1.6 billion, or 38 percent, from the first three months of the year. During the housing crisis, only 15 percent borrowed against their home’s value. 

If you’re considering borrowing against your home equity, at Sotheby’s Phoenix, I agree with usnews.com about three questions you should ask. 

Are You Borrowing for an Investment?

Using your home equity money for a project that’ll add value to your home is the best use. At Sotheby’s Phoenix, I know an even better use of a home equity loan is to reinvest the money back into your house in hopes of adding long-term value. Keep in mind, not all home improvements provide the same long-term payoff when it comes time to sell, so weigh your options. 

Financing a vacation or other short-term desire is usually a bad idea. You could end up paying years for a vacation that only lasted a few weeks. 

Investing in an education is another good use of home equity money. But taking on any kinds of debt without completely understanding the terms could spell trouble in the end. 

Are the terms clearly spelled out?

At Sotheby’s Phoenix, it’s important to choose the right type of loan. For a home equity, there are two ways to borrow: a home equity loan or a home equity line of credit, or HELOC.  

A home equity loan allows you, as a homeowner, to borrow a fixed amount for a set term with a fixed interest rate. These type of loans normally require principal and interest payments each month, just like a standard mortgage. 

A HELOC give you access to a flexible amount of money but with a limit — just like a credit card. The interest rate is variable which could work in your favor if interest rates decline.  However, interest rates could also go up, meaning you’ll pay back the lender more. 

You have the option of making interest-only payments to make the loan more affordable, but eventually, the principal has to be paid back, something you need to take into consideration or else it could be a shock down-the-road.  

Is There a Contingency Plan If Home Values Decline?

While it appears the housing crisis is over in most communities across the U.S., some housing experts think its a prelude to another bust in home values. The best thing you can do when borrowing against your home equity is to have a contingency plan, just in case you lose your job and are forced to sell your home when values have declined. A NeighborWorks survey found 30 percent of adults have no emergency savings.

I know at Sotheby’s Phoenix there are many things to think about before borrowing from your home equity so that’s why it’s important to  do your homework.