Should I Consider a Home Equity Loan?

Buying a home is going to become more difficult in the coming months, due to the U.S.’s lower credit rating and the possibility of interest rates rising in the near future if the Federal Reserve doesn’t thwart it in some way. But, what if you already have a home, and you’re finding that the poor economy is leaving you strapped for cash, especially for things you truly need?

One of the options that you have is called a Home Equity Loan or Home Equity Line of Credit. Equity is, in short, the difference between what is owed on your home and the fair market price of your home, which is determined by your bank or other financial institution. For some of you, this probably sounds great, but here’s something you should think about: The housing market isn’t at its best.

A friend of mine is attempting to sell her home for around $140,000. They got it for $160,000. At this point, her family is losing $20,000 on this house when they finally sell it… if they can sell it for that much. I’ve watched houses in my area go unsold and dip below $100,000 because they just won’t sell.

Can you see the issue? Say that you’re my friend, and you bought your home for $160,000, and in the three years you’ve had your home, you’ve paid off about $25,000 of it, putting your total loan at $135,000. If you were to take out a home equity loan at this point, it would be worth $5,000.

Now, $5,000 may be all you need to pay for whatever you’re paying for. Usually it’s recommended that you pay for home improvements or other investments that don’t depreciate in value, like educational expenses. So, $5,000 may go a long way if you’re just adding a deck onto your house, but it won’t go anywhere if you’re paying for a year of college. Also, because of the nature of the loan (you’re putting your house on the line), you shouldn’t buy things that depreciate, like a car or new computer, with your home’s equity.

On top of that, you should also compare interest rates with other loans that you may be eligible for. As I said before, interest rates will be on the rise soon, so if you’re considering a loan at all, you need to do it quickly. Currently, the rates of most home equity loans are quite low because banks are trying to encourage continued borrowing.

Another option is a home equity line of credit (HELOC). HELOC’s are used for cash advances and like a line of credit that you use against your house’s value. HELOC’s are often more flexible than home equity loans, but the interest rates are variable, thus making it a bit more of a risk to take it out, in case the interest rate goes higher than other loans.

Before making any decision, talk to a financial professional and do research. See if it’s within your best interests to borrow anything at all, or if you can wait on it until you have the money in hand. Home equity can be incredibly useful, but it can also be detrimental to your credit if used incorrectly.

 

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