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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.

Most consumers know by now that mortgage rates are approaching all-time lows. With the national average for a thirty-year, fixed-rate mortgage hanging just under four and a half percent, there has never been a better time to buy a new home – or to refinance your home loan on a property your already own. It’s ironic that, when so many people are terrified of losing their homes to foreclosure, it’s easier than ever for consumers to afford their own residences. With rates so low, many consumers are finding that their closing costs are either nonexistent or ridiculously low. In terms of refinancing, the experts say that if you stand to save more than a quarter point, it is worth giving it a try.

I’ve heard of some off reasons to borrow against the equity in one’s home, but this surely must take the cake as the strangest one I’ve read recently. There’s no doubt that nice landscaping will take you far if you are looking to see your home, don’t get me wrong. A few nicely-maintained flower beds and green grass will instantly look inviting and attractive to browsing buyers, and add curb appeal value to your home. On the other hand, borrowing against your home equity to fund a landscaping project is a little bizarre – to say the very least! I’m not trying to be judgmental, of course… just realistic.

In exchange for charging lower fees for reverse mortgages, homeowners seeking one of these “Saver” loans would be eligible to cash in ten to eighteen percent less equity on their homes. This is intended to keep the FHA from losing money the way it has been doing on current reverse mortgages.

There’s a tremendous tendency among homeowners to think that every penny you sink into your home is an improvement that will reap you corresponding equity if and when it ever comes time to sell the property. Too bad that things don’t at all actually work that way. Statistics show that, for every thousand dollars that homeowners spend making their homes “better,” they can only expect to recoup around six hundred dollars. And that’s in best case scenarios.

It’s more bad news for home prices in the state of Ohio, an area of the country hit especially hard by the housing collapse and the continued toils of the Great Recession. A new report from Cleveland showed home prices in the northeastern part of the state taking a veritable nose-dive, right in line with overall U.S. home values that were at a ten-year low. From coast to coast, individual housing markets are painting a very clear picture of just how bad off the real estate situation is.

The president is hard at work thinking up ways to overhaul his administration’s tackling of the foreclosure crisis, say experts. Obama is looking to set requirements obliging lenders to lower or eliminate mortgage payments for those homeowners who have lost their jobs. Under the proposal currently being considered, banks would be required to cut mortgage payments to where they accounted for no more than thirty-one percent of the borrower’s income, which is usually equivalent to the amount of unemployment insurance that they qualify for receiving, for anywhere from three to six months.

Mortgage rates are at historic lows, and there is evidence that they will continue to fall in weeks to come. Last week, the national average mortgage rate bottomed out at 4.44%, according to Freddie Mac. Usually in times like these, prospective homeowners and those who already have mortgages would be lined up in snaking queues around the block to attain mortgages and refinancing to get better payments.

Ethics and morality have very little place in real estate. That old axiom had never been truer than in this day and age. I recently read an article in the Denver Post about “buy and bail” homeowners – those who purchase a home when they already own one that is upside-down on equity and considered to be a poor investment – and then ditch the first home. The new home is purchased before the conniving homeowners’ credit scores are trashed by the strategic foreclosure that they plan on executing.

National real estate tracker Zillow.com has shown the value of houses and other properties in South Florida plummeting again, continuing a trend that is by now several years old. This area of the Sunshine State ranks among the twenty worst in the whole country for home values having fallen significantly lower than the houses in question are worth. The sad part is that experts say that the Greater Miami-Ft. Lauderdale market has yet to bottom out, meaning that darker days are still probably ahead for this troubled region.

I recently read a disturbing article in the New York Times having to do with the repayment of home equity loans that were borrowed during the height of the real estate bubble that precipitated the current economic crisis. In the halcyon days of blooming real estate values, during the first part of the last decade, homeowners across America borrowed upwards of a trillion dollars in cash against the grossly inflated values of their homes. Just a few short years later, with home values in the tank, the money spent, and these same consumers exhausted from a half-decade of recession, most of these borrowers are either unable or disinclined to pay back what they technically owe.