The Comprehensive Home Equity Loan Guide
Sometimes, you just need to spend a lot of money really quickly. In those times, you can think of your home like a great big, wooden piggy bank shaped like a house. Let us show you how a home equity loan can be your giant piggy-smashing hammer below. Or, if you want to be spared the pig metaphors, contact a professional at home.loans for the details.
Home Equity Loans Basics
As you pay your home mortgage down, years into your mortgage-paying experience, you’ll start to experience two feelings almost simultaneously. First, you’ll feel pride, for making progress toward such a huge financial goal and secondly, you’ll feel like you would really like to remodel your bathroom, if only you could somehow recapture some of that money you’ve already paid toward your mortgage. This is where a home equity loan comes in. In many cases, you can do that bathroom thing, using what’s commonly called a second mortgage and getting a great big check that you’ll immediately spend at Home Depot.
Second mortgages work much like your first mortgage does. They’re sometimes for shorter terms, so they’re paid in full before the first mortgage is, but you’ll be billed at the first of the month, you’ll pay it online or through the mail, and so forth. As long as you have plenty of equity in your home, they’re fairly easy to qualify for, since your bank kind of assumes you’re attached to your house and would make that payment before others. Read all the fine print, however, because there are adjustable rate home equity loans. It’s important to know exactly what you’re getting into for that new all-glass shower stall.
Getting a home equity loan for repairs or renovations
For those who want to repair or renovate their home, getting a home equity loan can seem like an ideal solution. But before you jump, it might make sense to hold your horses and think about the big financial picture.
Before you decide to get a home equity loan, it might help to ask yourself these questions first:
- Do I really want the renovation-- or need the repair?
- Will the repair or renovation add significant, long-term value to my home?
- Will I easily be able to finish the renovation or repair with the money I'm getting from my home equity loan? This is important, because if you leave a serious renovation unfinished, you may not be able to get any more loans until the home is livable again.
WHAT ELSE CAN YOU DO WITH A HOME EQUITY LOAN?
In addition to using home equity for repairs or home renovations, some people (especially those in serious credit card debt), decide to use a home equity loan to pay off their credit cards. While this might sound controversial, since home equity loan interest rates are often significantly lower than credit card interest rates, it can actually make financial sense to do this. In some situations, people even use a home equity loan to buy another house, often as an investment. While this can have benefits, since the home equity loan will usually have a lower rate than a second mortgage, it can also be risky. So, unless you're a seasoned real estate investor, or really know your stuff, this might not be the greatest idea.
Home Equity Loans vs. HELOCS
Sometimes, homeowners confuse home equity loans with their financial cousins, home equity lines of credit (HELOCS). And, while these two financial products are similar, they're definitely not the same. Home equity loans allow homeowners to borrow a specific amount of money, with their home acting as collateral to secure the transaction. In comparison, a HELOC provides a revolving line of credit that also uses your home to secure the deal. While home equity loans might be best for big, upfront costs, like home renovations, HELOCs are often better for smaller, recurring costs, like paying your kid's college tuition each semester.
Pros and Cons of Home Equity Loans
Home equity loans are loan products that have a dark side and a light side, kind of like The Force. Unlike The Force, you can totally destroy your financial world if you misuse a home equity loan, and that’s not really an exaggeration. Let’s take a look.
Pros and Cons of Home Equity Loans
|Tap your home equity without selling. Sometimes, you just want to borrow a little money to fix your house, not sell your house off. It’s a great house, but you don’t have the $10k it takes to put on a new roof. A home equity loan can help with this.||Generally requires significant equity accumulation. There was a time when lenders would loan up to a total of 120 percent of a home’s value with a home equity loan. Those crazy times are over and most lenders stick to a much more conservative 85 percent, total, between your first and your potential second.|
|Relatively easy to qualify. Since you already own your house and you’ve shown a willingness to pay your payments on time for a while, a home equity loan can be a really easy sell for lenders. Just make sure your other credit is in good shape, with no late payments, and they’ll take you seriously.||Increases your home-bound debt. This point cannot be stressed enough. A home equity loan is a new loan against your home. You can’t just shed it like a credit card if things start to go south, it’s secured by your house. So, it’s kind of a big deal.|
|One lump sum check for large purchases. That new roof, or the bathroom remodel, or even the addition you’ve been planning -- they’re all big buys all at once. You need a big check for that.||Can leave you in financial ruin. It would be lovely if it wasn't so, but the truth is that when homeowners take out home equity loans without a plan for repayment or any concept of how it’ll affect the long term cost of the home, financial ruin often follows.|
Who’s the Ideal Borrower for a Home Equity Loan?
Home equity loans aren’t for everyone. These loans require careful consideration, a long term vision for your financial path and a willingness to grin and bear it if you suddenly find the new payment a little less comfortable than you imagined.
The ideal borrower for a home equity loan is:
Interested in using the loan proceeds to improve their home or financial outlook.
Saving in other areas, so adding a new payment isn’t as much of a shock.
Careful to shop around to get the best home equity loan possible.
Prepared to be underwater if the market turns before they’re ready to sell.
Despite needing to have a good amount of home equity, you don't always need a great credit score to get a home equity loan. In the end, making the call to take out a home equity loan is a calculated risk, no matter who you are. Even just tapping up to 85 percent of your equity can put you in a tricky place if you’re in a volatile market, so you should be prepared to stay put until you’ve paid the new loan down significantly. Many homeowners put any extra they have toward the second mortgage (make sure you have no prepayment penalty!) in order to free up that equity burden faster.
Home Equity Loans: In Review
When you start to ponder the equity you have tied up in your home, take a long walk. A really long walk, if necessary. There are certainly times when you have no choice, and other times when it makes the most sense, but if you’re thinking about tapping it for a destination wedding or, you know, a self-driving bus, just don’t. That money is emergency money. It’s not even money, it’s more like a built-in home repair coupon.
If you do tap it and don’t think you can trust yourself with the big check, hire an accountant for the short term or find a friend you can trust who will only give you small amounts at a time when you ask and return with receipts. This is essentially how construction loans work and it helps to keep everyone accountable for every cent that’s spent. It also saves you from wasting money on chocolate and energy drinks while you’re standing in line at the home improvement store.
Tapping your home equity can be the right move, or it can lead to ruin. Sometimes you need a neutral third party to help you take the whole thing apart. Here at home.loans, we’re happy to be your sounding board, so contact us today -- we’re just spinning around in our office chairs waiting for you.