Unforeseen events happen all the time. A divorce or death can devastate us, emotionally and financially. Jobs are lost without warning, pension plans discarded. Without substantial liquid funds in the bank to pay for sudden emergencies, entire lives can fall apart and we can spiral into debt. Too often, our credit rating takes a serious hit as we struggle to pay off high interest loans and credit card debt.
When it comes to out-of-control debt, a home equity loan can be a good solution
There are, of course, many ways to get money when the need arises. You might consider charging up the credit card, but the interest you will pay can make your debt much worse. You might borrow from your 401K or IRA, but you will pay severe tax penalties and whittle away at your retirement. One thing to consider, if you own a home, is a home equity loan. Your home can be a wonderful source of capital.
Why you might choose a home equity loan
To Consolidate Your Debts
Have you fallen into deep debt and lost sight of the way out? Consider utilizing a home equity loan to consolidate your other debts into one
. This can help you overcome debt and free yourself. You will have just one monthly payment, designed to be lower than the sum of all your previous outstanding debts. As an additional benefit, your lender can oftentimes pay the other debts off for you with the funds from a home equity loan. When it comes to out-of-control debt, a home equity loan can be a good solution for many people. Compare rates now at our home loan center
to see it this is right for you.
To Pay Off High Interest Loans
Taking out a home equity loan for this purpose can save you a substantial amount of money. If you are stuck with high-interest loans, something that can easily occur with credit cards and other types of unsecured debt, consider taking out a home equity loan at a lower interest rate. Use it to pay off those loans and enjoy a lower monthly payment with smaller interest costs. See if you qualify for lower interest rates at our home loan center
Other Reasons to Consider a Home Equity Loan
When it comes to comparing interest rates, a home equity loan has advantages over credit cards and other non-secured loans. Interest rates on home equity loans have historically been substantially lower than credit card and other non-secured loan interest rates.
Also, mortgage interest is tax deductible. Generally, you can claim the interest you pay on your home equity loan just as you do on your original mortgage. Most other types of loans carry no tax advantages. The more you pay in mortgage interest, the more you can deduct on your taxes. You can see why this type of loan could be beneficial when you use it to pay off a high-interest car loan, for example.
There are reasons many people tap into their home equity that have nothing to do with debt. Some use it to pay for college tuition, other to improve their homes to increase the resale value and still others to simply purchase something they want.
If you use a home equity loan to make improvements to your home, you could possibly qualify for additional tax credits and deductions. Several new tax credits have been implemented to help you pay for the type of improvements that save energy. Getting tax credits, tax deductions and energy savings can make a home equity loan a very attractive idea.
Remember, to make either of the above plans successful, you must be careful to avoid racking up new debts as you pay off your old ones. Acquiring new debts may only create a new series of problems and negate the benefits of your home equity loan.
An explanation of a home equity loan
A home equity loan is not that complicated. It is a loan offered at most banks and mortgage companies, for which you pledge your home as collateral. This means the lender can take your home away from you in the event you do not pay back your loan. A home equity loan, or second mortgage as it is often called, can be quite beneficial, but it should not be undertaken without confidence that the loan can be paid back.
In order to be competitive with other types of loans, home equity loans offer several advantages. For instance, a home equity loan usually has a fixed interest rate and a monthly payment that will never change. Various lengths of time to pay back the loan can be explored, which will raise or lower the amount of the monthly payment. Some lenders also offer adjustable rate home equity loans. In these, the interest rate can go up or down, changing your monthly payment, according to the national prime interest rate. Sometimes an adjustable rate loan is the best choice because it can get your loan started at a lower interest rate. Remember, however, that the interest rate can go up, and if it does, your payment will go up as well.
Estimate your home equity
Home equity is what a buyer would pay for your home, offset by the outstanding debts you are carrying against its value. Such debts are mortgages, equity lines of credit and other types of liens. If your house appraises for $150,000 and you have an outstanding mortgage of $100,000, then your equity value would be $50,000.
To determine your equity, you must first determine your home's value. This will require the services of a qualified appraiser or a real estate agent. Appraisers can be expensive, charging $200-$400 for a thorough appraisal, while real estate agents are often willing to provide information free of charge. Of course, the appraiser's evaluation is generally more accurate and detailed. It is acquired through the careful study of many factors, including the location of your home, the type of construction, the "extras" and the square footage. A real estate agent's evaluation is based on what homes in your area are currently selling for.
Poor credit and a home equity loan
The credit score each of us carries shows a lender our payment history. The average credit score is somewhere in the 600s. Credit scores can range from a low of 300 to a high of 850. If your credit has suffered, and you have time to take steps to improve it before applying for a home equity loan, pursuing that goal would be a good idea. But many people with poor credit get home equity loans for the purpose of debt consolidation and to pay off high-interest credit cards. In the short term, you have taken out another debt, but after you pay off the other loans and continue to make regular payments on your home equity loan, your credit score should gradually improve.
Poor credit affects the interest rate you will be offered for almost any loan. If you haven't seen your credit report in a long time and are thinking of applying for a home equity loan, get a free copy of your credit report
. You're entitled to a free copy once a year. Look it over carefully and understand what it says. It is very common for both minor and major errors to show up on credit reports. You can deal with such errors on your own, by writing letters to the credit agencies
and to your lenders, or you can work with a credit repair organization
. It really is a good idea to keep a close eye on your credit report, especially with the relatively new threat of identity theft plaguing us all.
Use your equity wisely
Be careful what you choose to take out a home equity loan for. Debt consolidation is a valid reason for a home equity loan, as is saving money by paying off high-interest debts. Making improvements to your home that will add to its resale value can also help you in the long run. It makes sense to use such a loan to help with college tuition costs. Using the equity in your home to buy recreational vehicles or purchase expensive vacations is not the best move to make. Use your equity wisely, with the goal in mind of improving your future.
Additionally, be careful when you are thinking of improving your home to increase its value
. Do the necessary research of the value of homes in your neighborhood before you begin. Will the area support the improvements you're making? Will you be able to get your investment money back when you sell? If you spend so much that your house becomes too valuable for your neighborhood, you could lose money.
A home equity loan compared to a home equity line of credit
A home equity loan is a "closed end" loan. This means that you borrow a specific lump sum of money up to the value of your equity, and you pay it back, with interest, over a specific period of time. Usually, the interest rate is fixed.
A home equity line of credit is open ended. You can use any amount you need up to its limit, at different times, and you can pay it back at any time. Usually, the interest attached to lines of credit is variable and will fluctuate with the prime interest rate. A home equity line of credit is similar to a credit card or a checkbook. You can utilize cash up to the upper limit, which is the total of your equity. Sometimes, a home equity line of credit is a better choice because you only pay interest on the specific amount that you've borrowed instead of paying interest on the total sum of your equity, as is usually the case with a home equity loan. Generally, lines of credit also offer lower interest rates than do equity loans, although both are less than a credit card because they are secured by your property.
Consider taking out a home equity loan when you need a large sum of money for a specific purpose, like debt consolidation or a costly home improvement project. Use the equity line of credit to help with continuing financial needs like education costs or several home improvement projects stretched out over time.
Watch out for fraud
As with nearly everything else in life, it is important to remember that fraud exists with home loans. Don't let scammers fool you. Be wary of any offer that seems too good to be true.
A better choice than falling for ads on TV, the radio or the Internet, would be to approach the mortgage company or bank where your original home loan is secured. Research prospective companies through the Better Business Bureau or the Internet to see how other people have fared when using that company.
Be careful about the documents you sign. It is best to have professional advice from a banker or attorney before signing documents that pertain to your home and its ownership. Scammers have fooled people into signing quitclaim deeds.
If someone comes to your door and offers you a great equity loan deal, don't be fooled. Legitimate business people do not go door to door trying to drum up contracts.
You have probably seen advertisements on the Internet for home equity loans, even if you have not searched for them. Watch out. Some websites will solicit your private information, either on the site or via "phishing" emails. These websites and emails may seem official, but they are not. This is how people become victims of identity theft and other scams.
Interest-only loans and balloon payment loans are oftentimes attempts to make it impossible to pay back your loan. That way, the lender can foreclose on your home and take it away from you.
Shop around for the best rates and home equity loan offers. This is a good idea on many levels. Not only can you negotiate with legitimate companies for the lowest interest rate, but you can usually weed out scammers by taking your time and doing your research.
Another thing to remember is the cool-off period you are entitled to by law. If you sign a loan contract then change your mind within three days, you can cancel the loan in writing.
The equity in your home is waiting for you to use it
When thinking about your financial needs, remember that you have equity in your home that can be used. Don't be afraid of using it, if it is for a good purpose. Treat the equity in your home with respect. It is not only a resource but also a big slice of your financial assets, and if it is cared for properly, it will be there when you need it.