Three years ago, discerning whether a home equity loan was a good choice was much simpler. As we know, though, a lot has changed and now, many Americans are asking themselves if now is a good time. Here are a few considerations to keep in mind if you’re pondering the pros and cons of these types of mortgages.
Past and Future
Many homeowners were deeply affected by the economic problems of recent years. They had already taken out second mortgages or other home equity lines of credit (HELOC) at the worst possible time.
They were already close to their appraised values and then, when the job losses began coming on a daily basis, hundreds of thousands lost their homes as a result. The economy still hasn’t recovered from that aspect of the recession. Not only were Americans losing their homes and jobs, but their credit histories were annihilated as well. This presents an entirely new dynamic of financial problems now that most are on the upswing.
For those who did manage to bypass the catastrophic downturn, these are the folks who are now beginning to rethink whether a home equity loan is a good choice. Many are wanting to pay off credit card debt, student loans for their college students, automobiles and other personal loans.
Remember that your home is the collateral for these types of loans. You should closely examine exactly how much money you’re hoping to borrow against your home. Remember, too, it’s the equity you’re borrowing – so you’ll want to be sure you use the funds carefully, lest you find yourself in difficult financial waters. For instance, a loan for home repair or an improvements can greatly increase the value of your house. This is always smart thinking. It’s those who are thinking they’re going to use their funds for vacations or other unnecessary expenses that might wish to rethink their priorities. Keep in mind, though, these are just our tips – and this in no way is to be considered a road map to how any homeowner spends funds from his HELOC.
Next, you’ll want to speak with a professional as you decide how you want to define your loan. A HELOC is just what it says: a line of credit. This shares many of the traits your credit card has. It’s a revolving line of credit you access as you need it. In fact, it can even be placed on a traditional credit card.
Home Equity Loan
A home equity loan will mirror your current mortgage. You’ll receive a one time payment and you’ll repay the fixed payments each month. Again, this too is money you’re borrowing against the equity in your home.
Be sure to shop around, too. Your local bank might not offer the best interest rate – and ultimately, that’s what you’re looking for – lower interest and more money going towards your actual loan. If you are unable to pay back the money that was borrowed, the lender might have a legal case for starting foreclosure proceedings. Also, and this is were many struggling homeowners ran into problems: because you’ve used the house as collateral, you will be required to repay the loan before you can sell your house.
Here’s how the differences look on paper:
This line of credit is extended to you with a certain threshold. You borrow against that line of credit when it’s necessary. You may have $50,000 in equity, but you may only borrow $10,000. You’re paying interest only on what you borrow. It’s a great long term solution, too.
Traditional Home Equity Loan
The equity is determined and then you and your banker decide how much of that equity you wish to borrow. Each lender has its own guidelines, so you’ll want to carefully review them. Many homeowners like these types of loans, especially if there’s significant credit card debt. You receive the proceeds in one lump sump and repay the month each month, even if it’s sitting in the bank.
Of course, this is in no way meant to replace financial advice from a professional. Carefully weigh your options before you decide. Remember that it’s your equity, but you’re still bound by the legalities in the contracts you sign. If you’re unsure of how anything transfers from paper to real life, you are strongly encouraged to seek out that type of guidance so that you’re not struggling a year from now.