 It
seems like any excuse is enough to make people run and start tapping
into their home equity. A recent MSN.com article discussed the
tremendous growth in home equity lending, and gave some tips on
how to wisely tap into the equity built up in your home.
According to smrresearch.com,
growth in home equity loans went over 30% in 2004. Does this mean
the lending institutions are taking on more risk? On the contrary,
lenders are in the same position they always are, because your
home is the collateral, so there is generally very little bad
debt. This growth trend has been seen for both home equity loans,
which are similar to regular mortgages, and in home equity lines
of credit, which are more like credit cards in that you are given
a credit limit, upon which you borrow against.
Which loan type you chose will depend on your
specific situation, but once you have decided, think about the
following five tips before plunging head-first into more debt!
Getting a Good Rate
Unfortunately, the tale everyone has been
telling is true; an awful lot depends on your credit score. You
can expect to get the following rates based on the following credit
score boundaries:
| Good Credit |
>760 |
½ point below prime |
| OK Credit |
700-759 |
prime |
| Poor Credit |
<700 |
anything from 1 to 5 points above prime. |
Paying Minimal Fees
Certain fees, such as recording fees and annual
account fees are to be expected, but they should not be extravagant.
Other fees, such as application or appraisal fees should be avoidable
if you have decent credit – make sure you are aware of all
the fees getting tacked on to your loan, and that nothing is out
of the ordinary.
Tax Rules
If you have enough deductions to make itemizing
your deductions worthwhile, then obviously being able to also
deduct the interest portion of any new line of credit is a good
thing. However, if you do not have enough deductions, then it
is possible that other loans will actually give you a better rate.
The bottom line is shop around, and do not be fooled into thinking
tax deductions automatically make this the way to go.
Understand the Consequences
Getting a new home equity loan or line of credit can be an excellent
way to solve some tricky financial issues – as long as you
are aware of what the consequences are. By borrowing on the equity
in your home, this reduces the amount that can be used to buy
your next home, or can be used for your retirement when it comes
time to move to somewhere smaller.
20% Rule
Another consequence of tapping into your home equity is that
you are nibbling away at a source of savings that can be used
in times of emergency. A sensible rule to try and abide by is
to always have the total of your mortgage and home-equity loans
not to exceed 80% of the value of your home. This leaves you at
least 20% of the value of your home that can be used if there
is an emergency.
Everybody’s situation is different, and there is no easy
answer as to whether getting a home equity loan is right for you.
However, by understanding your situation and the reality of home
equity financing, you can discuss your situation with a home equity
loan expert, and determine the right course of action for you!
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