Home equity loans are making a comeback as home values rise again. This time around, though, lenders have stricter requirements. You’ll find that you have to verify your income and assets much more thoroughly than in the past.
This doesn’t mean a HELOC is hard to come by, though. Before you jump on board, consider the following mistakes you’ll definitely want to avoid.
Taking out a HELOC for Non-Valuable Upgrades
Putting money into your home isn’t always a great investment. What you may think is an upgrade, others may not feel the same. In fact, only a few upgrades actually reflect in the value of the home. Major and minor kitchen upgrades, bathroom renovations, and adding additional rooms often reflect in the home’s value.
Cosmetic changes and those that are more personal in nature may not change the value of your home. When you use a home equity loan to pay for the renovations, you take equity out of your home. You are then left with less equity, a higher payment, and a stagnant home value.
Talk to a real estate professional before you decide to invest in the home upgrades. If they are not something that may add value, wait until you have the money to pay for the upgrades yourself. This way you don’t use the money you’ve accumulated in your home.
Consolidating Debt With Home Equity Loans
You are in over your head in credit card debt and see the equity in your home just sitting there. You probably think it would make sense to consolidate the debt with your home’s equity. You can then write off the interest you pay and have one monthly payment. It sounds like a great deal and it could be, if you never use your credit cards again.
Who’s to say you won’t charge things up again though? What got you into debt in the first place? Was it a passion for shopping or did you meet hard times financially? Whatever the case may be, how do you know it won’t happen again? Unless you are 100% certain that you won’t use your credit cards again, you shouldn’t use your equity to consolidate debt.
To make matters even worse, your credit card debt is unsecured debt. If you don’t pay it, the credit card company can’t take anything away from you. Sure, they could file a judgment against you, but that takes a long time. If you roll your credit card debt into your home, though, you could lose your home if you default on your debts.
Not Shopping Around
Home equity loans cost money. The lender and various third parties charge closing fees. You also have to pay interest on the loan. Many lenders charge points just for giving you the loan because they take a risk taking second lien position.
If you don’t shop around, you could be taken to the cleaners. How will you know what the average closing costs are for the area? What about the interest rate and term? Are you being offered a fair shake or are there other options available? Check with at least three lenders to see what they offer. You can then compare each loan and determine which one would fare the best in the end.
Look at the big picture – thinking long-term. How long will you be in the home? What is your plan for paying the loan off? Will you make minimum payments or will you pay back what you borrow as quickly as you can? These are questions you must ask yourself in order to find the best deal.
Not Planning for the Future
Home equity loans offer attractive payments during the draw period. This could mean the first ten years. You only have to pay interest on the money you borrow. If you have a $50,000 line of credit, but only draw $1,000, you only pay interest on that $1,000 every month.
Of course, just like a credit card, you are free to pay back the full $1,000. You then have access to the funds again until the draw period ends.
Once the draw period does end, you are in the repayment period. This is when principal and interest come into play. The loan gets amortized over 20 years in most cases. If you took out the full $50,000, you could have a hefty payment in front of you. Always ask the worst-case scenario when you apply for a HELOC. This way you know the full payment you could be liable to pay. You can then determine if you can afford that payment. If it seems extreme now, don’t take a chance.
Too many homeowners found themselves in payment shock when the repayment period began. This puts your finances and your home at risk. It’s not worth the risk. Find out what you might owe before you sign on the dotted line.
Home equity loans can be a great way to access your money. You must have a plan in place, though. Know what you can afford and know your plans for the future. Are you planning to move soon? If so, do you want to invest money in your home or just leave it as is? If you use the funds, you’ll have less in your pocket when you sell your home. This could put you in a financial bind if you want to buy another home.
Look at all aspects of the HELOC before deciding what to do. This way you can make an informed decision and get the loan that is right for you!Click to See the Latest Mortgage Rates»