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Using Your Home Equity for Credit

There are times in life, especially in todays’ economy, when you need money. Maybe you were irresponsible, spent more money than you had, and are now in the hole. Maybe a medical condition, not covered by insurance, has caused hospital bills to pile up. Maybe you want to remodel your house. Whatever the reason, your house’s equity is one option available to you if you’re hurting for cash. The two ways of tapping your equity are by receiving a home-equity loan, also called a second mortgage, or by opening a home-equity line of credit. I must stress that neither option is to be taken lightly. Realizing you’re unhappy with your wardrobe and want to go on a shopping spree is not a reason to tap into your home’s equity.

Home Equity Loans

A home-equity loan, or second mortgage, is basically putting a second lien on your house. Once your house is reappraised and assigned a value, you can be given a loan for a certain percentage of that value. The percentage varies depending on the housing market, your credit, and who is giving you the loan, but typically it’s possible to get a loan for 75% to 90% of your house’s value.

If you are accepted for a home-equity loan, the lender will write you a check for the full amount. You will then start immediately making monthly payments on the principal and interest. The loan is usually at a fixed-rate for 10 to 15 years. Second mortgages usually have higher interest rates than first mortgages, so again, this is not to be done for anything trivial. Home-equity loans are a good way of getting cash right away that you can put to use to make money in the long term. One example would be using the loan to remodel your house, which would increase the home’s value when you go to sell it later. Another wise use of a home-equity loan would be to open a small business.

Home-Equity Line of Credit

Home-equity lines of credit are variable-rate credit lines similar to a credit card. You are given a maximum limit based on the amount of credit for which you are approved and can borrow and pay the money back at will on your own schedule. You simply write a check or use a check card against the line of credit rather than your checking account. With home-equity lines of credit, you only pay interest on the money borrowed –  at least at first. The lines of credit are all different, so be sure to ask the terms before signing anything. Sometimes lenders will charge you interest only on borrowed money, or a smaller rate, during the advance term. Then during the repayment term you could owe the principal and a compounded interest, have to access to the funds, and be required to pay on a monthly schedule like a credit card. Often you could have a 5 or 10 year period to pay off the loan but only be able to access the credit during the first half of the period. Again, the key is to understand the terms and make sure they will work for you.

Caveat

Borrowing money is always a risk and should only be done if necessary and if you have a feasible plan for paying the money back. If you put a second mortgage on your house and are later unable to pay it, the same thing happens as if you default on your first mortgage: You will lose your house. Also, as with any loan, don’t blindly accept the maximum amount that the lender is willing to give you. There are a lot of foreclosures that have happened because people were unaware of how much money they would be able to repay. If you’re offered an 85% loan but only need a 70% loan to get the job done, take the 70% loan. All money you borrow you have to play back, plus interest, so don’t borrow money you don’t need. Also, lines of credit may have a balloon payment, where during the 10 years, or whatever the length, you can borrow money at will and only have to pay interest in the loan. At the end of the term, however, the entire balance is due. Someone who doesn’t budget properly can get into trouble that way and possibly even end up owing more than the house is worth. Again, the key is to budget and be careful.

In Closing

The application process for a home-equity loan or line of credit is very similar to the process for a first mortgage. The lender will appraise your house and determine if you have the ability to repay the loan. As with any loan, you should shop around for the best deal. If done correctly, tapping into your home equity can be a wise decision. Just do your homework, stick to your budget, and play it safe.

Soon we’ll be listing additional reviews of the top sources for home equity loans online.

Once upon a time, dealing with the issue of the family home in a divorce agreement was a fairly simple matter. As recently as five years ago, with home prices steadily rising and equity a given, couples would simply agree to dispose of the home, split the (all but guaranteed) profits, and get on with their lives. Things are no longer that easy, says family law attorney Kim Surratt of Reno, Nevada. More and more frequently, Surratt and other divorce lawyers are struggling to make things fair between estranged couples when their marital “assets” amount to a huge amount of negative equity. It’s unknown on the whole how divorce lawyers are dealing with the problem of negative equity – the only thing for certain is the fact that sixty percent of Nevada homeowners are underwater (have negative equity) on their homes, according to CoreLogic analysis, and people are just as likely to divorce as ever before. The result is that both real estate professionals and divorce lawyers are facing issues with how to fairly split the problem with couples decide to make a break of it.

It sounds like the perfect situation: you buy a cozy little second home somewhere as a vacation getaway, and are able to use it years later as a retirement cottage. Sounds perfect, right? The problem is that, with any investment – and especially with real estate – things seldom work out exactly the way that we wish they would. You need to weigh your risks and go into everything with eyes wide open, knowing that there is a good chance that things won’t work out.

Unlike TV sets and sweaters, real estate doesn’t usually go on clearance. And yet, if you have the time and funding to undertake a major home renovation project, you could become the proud owner of a storied Victorian mansion in Riverside, California for the low price of just one dollar. The city is desperate to see two historic homes rehabbed and moved from their current locations, which is why they are offering the homes for sale at the ridiculously low prices.

Washington, DC has long been known as a city that is good to low-income homebuyers, often subsidizing home purchases that these poor people would not otherwise have been able to afford. Unfortunately, that largesse seems to have turned around and bit them in the rear in these days of a troubled housing market. At present, twenty percent – or one in five – of all buyers participating in the city program, which is thirty-five years old, is behind on their mortgage payment, according to city officials. It’s a startling default rate that is no less than three times higher than the overall national foreclosure rate. The Washington Post has determined that nearly fifty buyers received notices of foreclosure in recent years, while over fifty more are behind on either their HOA or utility liens.

Bank of America has included in its program to donate homes for demolition in Detroit, Cleveland and Chicago held sessions for homeowners to meet with mortgage-modification specialists. Five hundred customers showed up in Cleveland, sixteen hundred in Chicago and fourteen hundred in Detroit. Furthermore, BoA competitor Chase Bank has also established a down-payment assistance program for Detroit city employees to move into vacant homes in designated areas, and CitiMortgage held events in several cities last summer where around one thousand homeowners met with officials about mortgage problems.

Talking about costs: the foreclosure crisis is creating tremendous costs for American families. According to numbers drawn up by The Center for Responsible Lending, foreclosures that took place in 2009 caused almost seventy million neighboring homes to lose an average of seventy-two hundred dollars apiece in equity, for a total loss of over five hundred billion in lost value.

Many American cities have made it a goal to move forward with more and more foreclosure demolitions. In Detroit, Michigan, which has arguably the most blighted housing market in America at present, there is a goal to demolish no less than ten thousand structures by the end of next year. To date, some four thousand properties – ninety-five percent of which were residential – have been torn down. The properties often come into the city’s possession by way of either donation, because of delinquent taxes or failure to respond to nuisance-abatement procedures

There are far too many foreclosed properties in America right now; that’s a fact we all know. The volume of foreclosures sitting around right now is a problem, since these vacant houses not only bring down property values in the neighborhoods in which they are situated, but also attract squatters, vandals, and vagrants, all of which increase the appearance and experience of blight. Criminals use them as a one-stop shop for stripped appliances, cabinets, pipes, doors, and windows. They are ugly, often vermin-infested, and are magnets for crime. They require an input of money for taxes and upkeep, which is then stripped away from any potential return coming from the eventual sale of the property. MSN Money puts forward one solution to the problem: let’s demolish foreclosed homes. Yes, you heard right – demolish them. Bulldoze ‘em to the ground, because we’d be better off without them. Allow me to explain.

Property owners in Detroit, Michigan, have discovered a loophole in tax laws that is allowing them to wave bye-bye to massive tax liens, sometimes hundreds of thousands of dollars’ worth, for just five hundred dollars apiece. How is this possible? Well, according to MSN Money, some ethically-challenged landowners are letting their taxed-up properties slip into foreclosure and then buying them back from the county for the low sum of just five hundred dollars apiece. It sounds too outlandish to be true, but it’s astoundingly not. From Detroit there are coming stories of landowners gaming the system to avoid huge amounts of taxes.

Once upon a time, flippers got a pretty bad rap. These investors, who buy homes at rock-bottom prices and then resell them, possibly with some refurbishment in the interim, chase profits. Before the housing crash, when the market was at the biggest point of the bubble, these folks did a pretty good business for themselves. It was so good, in fact, that flippers took a lot of blame for driving prices up, and the government put laws in place meant to curtail those who would quickly buy and resell homes. Thanks to the tragic state of the housing market at present – yes, it is just that bad – flippers are actually getting a bit of a break, courtesy of the Federal Housing Administration. The mortgage insurer took the unusual step of extending a waiver of its anti-flipping regulations through 2012.