It seems that every other commercial is telling us to take out a home equity line of credit to pay off debt. After all, they say it's easy and there are no closing costs. Why not? People are using their dream homes to finance even better dreams, like a debt-free life and their children's college educations. While home equity loans are fairly easy to get, many CPA's and financial planners are cautioning homeowners to research how these lending options work before they put their homes at risk. There are two ways to use your equity to secure funding: a home equity loan or a home equity line of credit. Most lenders allow you to borrow up to 80% of the existing equity in your home, based on the amount owed on your first mortgage and the appreciated value of the property. Loans of $100,000 that use a home as collateral may be qualify for a tax deduction for the interest paid. Home equity loans are great for large purchases, such as major home improvement projects, starting a business, purchasing a second home free and clear or consolidating high-interest credit card debt. There are advantages to securing a home equity loan for these purposes. However, these loans are best suited for those who don't foresee future borrowing needs. A home equity loan is basically a second mortgage. You are provided with a set amount of money that is repayable over a fixed term from five to 15 years. These loans feature fixed interest rates and monthly payments that remain the same. A home equity line of credit is great for usage as emergency money. It can be used for irregular or unanticipated expenses like medical deductibles and auto repairs. These lines are often used by higher income families who make too much to qualify for college financial aid, but not enough to pay for college tuition and expenses. When faced with using a home equity line of credit or your savings to pay off credit card debt, you are better off using your savings to get rid of the debt, and your line of credit for future emergencies. With a home equity line of credit, you are approved for a credit limit. You can spend however and whenever you like up to your credit limit. You will usually receive checks or a debit card that can be used anywhere. Home equity lines of credit are usually variable rate loans. Using the equity in your home is a serious decision. Think about it carefully. If you are using the equity to consolidate high-interest credit card debt, it will only work if you do not accumulate any new debt. If you continue to use your credit cards, you are defeating the purpose of consolidation. Keep in mind that your credit card company cannot foreclose on your home, but your home equity lender can. You are placing your home at risk with each mortgage you take out. You must shop around for the best rates and terms. Talk with many different lenders. Read all paperwork carefully before you sign anything. Using your home equity can be a great way to get further towards your lifestyle goals, but be cautious. It is still debt. |
