Manage Your Home Equity Correctly

Many people have been taking money out of their home in either a lower-interest home equity loan or line of credit to pay down a high-interest credit card debt, school loans or for home improvements. It seemed to be a safe choice for the past several years as home equity was always rising!  But now with the current turbulence in the subprime market and the downturn in the housing market altogether, is it a good move to still do?

No.

Why Not?

Simple. Well sort of. According to the Mortgage Bankers Association, Americans currently have more than a trillion dollars in outstanding home equity loans. One-third of those homeowners used that equity to pay down credit cards.

While, it may had made sense to do this before to pay off higher interest loans with a lower rate, it doesn’t make sense now. Home prices are stabilizing and may end up decreasing in the next few years, placing you into a financial nightmare if you need to sell the house and can’t afford to make up the difference.

Here are some pointers to take into account when deciding what to do with home equity loans/lines of credit:

Build Assets

The most worthwhile reason to tap your home equity is to purchase appreciating assets. If the market is going up, say for housing (but not right now) then buy a second home and rent it out.

Don’t rely on home loans to pay credit cards

Usually when people borrow against their homes to eliminate credit card debt, they usually repeat the behavior and end up with more credit card debt in the future…creating a worse scenario as they’ve now used their home as collateral against the amount borrowed.

Instead, call your credit card company and ask for a lower interest rate.

Learn about home equity loans

• HELOC – stands for “home equity line of credit” and works sorta like a credit card. You are assigned a maximum amount by the lender of what you can borrow. You can use it when you need it.

• Home equity loan – Generally considered a second mortgage. It allows you to borrow a set amount in a lump sum up front. You can pay it back over a specified period of time which is typically either 10 or 15 years in monthly repayments. The interest rate is typically higher.

Research Interest Rates and Terms

Shop around for best rates like Bankrate.com, Lowermybills, Loanweb.com or your lender. Make sure to double-check if there is an origination fee or closing costs  involved.

Don’t use your home loan like the ATM

It’s been very easy to pull out money from your home over the past few years. While many lenders have conveniently given you access to your home equity, be careful and be smart about using it.

If you live off your equity to pay off credit cards, you could find yourself in a situation in a down real estate marketing (like currently), which could wind up owing more than your home is worth if you’re not careful. Think twice before borrowing and maybe stick to use your home equity in case of an emergency.