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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.

According to a news report released this week, residential foreclosures in the state of New Jersey skyrocketed in the past year to make the Garden State one of the worst in the nation. According to Realty/Trac, a real estatet statistics firm, New Jersey’s foreclosure rate was up an astronomical twenty-nine percent from 2008 to 2009, with counties in the southern part of the state taking some of the hardest losses. Commercial foreclosures did far worse, rising sixty-eight percent in the past twelve months.

Once upon a time, it might have been easier to buy a quarter-million dollar home than to rent an apartment. Around the middle of the last decade, the combination of ridiculously low lending standards and high demand for rented housing meant that apartment vacancies were low, and landlords could command top dollar for their properties. But oh, how the times have changed.

A New Jersey-based mortgage modification company has told a judge that it will discontinue doing business with consumers in the state of Idaho. A Legal Newsline report out of Boise broke the news of a settlement between state Attorney General Lawrence Wasden and Best Interest Rate Mortgage Company LLC on behalf of twelve complaining homeowners.

Bank of America, the nation’s second-largest credit card provider, will be welcoming a new chief executive officer this week. It’s hard to say if there has ever been a time of more upheaval and drastic change in the industry at the point when a new chief has come aboard a major American bank. There’s no doubt that Brian Moynihan will have his hands full when he takes the reins officially next week, after having been hired for the job back in August. The bank’s credit card business faces an uncertain future with the introduction of many new laws affecting the industry, and Moynihan has had to acknowledge his employer’s responsibility in creating so many of the problems that led to the changes.

A law professor from the University of Arizona recently published a highly controversial study on troubled home mortgages. Brent White went so far as to say that sinking homeowners should give serious thought to just walking away from their obligation, a view that has had him under fire for the better part of the last holiday week. It’s not that homeowners should blindly turn their back on their legal responsibilities, White disputes.

What we call “zoning” for school placement in the United States is referred to as “catchment” on the other side of the pond. And it seems that parents will pay dearly to secure the prime catchment for their beloved babies. At the highest end of the scale, this means that some parents are paying as much as eight thousand pounds more for homes close to educational facilities that are considered to be superior, give the average home price across the nation.

For a little while there, it looked like the desperately struggling American housing market may have been experiencing some relief. Today, the closely watched Standard & Poor’s/Case-Shiller home price index showed home prices falling again, following a marginal and brief rise during the months of September and October. The index follows home prices in twenty major metro areas throughout the United States, including Boston, Charlotte, New York, and Seattle.

Some experts have accused mortgage companies of profiting off delays in the modification process and milking homeowners during the drawn-out delinquency process during which they can charge many fees. Mortgage lenders, for their part, say that investors technically own the loans and that they cannot modify any contracts on their own steam.

The equity in one’s home is something of a comforting safety net. It’s always nice to know that, in the event of a real crisis, you could avail yourself of a home equity loan or line of credit and access the funds necessary to bail yourself out.

Never, ever fall in love with a home. “But Stephanie!” I can hear you protest, “One cannot control matters of the heart! And have you SEEN this house? I mean, it’s perfect! Hardwood floors, a study nook that’s perfect for my grandmother’s desk, a view of the lake…” (Can you tell I wasn’t kidding when I said that I have heard this before?) I’ll counter with this: if you find yourself in the regrettable position of having fallen head over heels in love with a house, please be more sensible about it than my high school girlfriends.