Home equity loans are nothing new, but especially in a market where people have seen the value of their homes rise astronomically, home equity loans have rapidly become a very popular way to tap into “equity” -- the difference between how much the home is worth and how much is owed on the mortgage. A home equity loan or line of credit allows you to borrow money, using your home's equity as collateral. (Collateral is property that you pledge as a guarantee to a lender that you will repay a debt. In the case of a home equity loan or line of credit, your home is the collateral you have pledged.)

Is an Equity Loan Right for Me?

There are excellent reasons for using your home’s equity mentioned below. It can make good financial sense, if used wisely – AND, if you fully understand the ramifications if you don’t.  After all, if you default, you could lose your biggest asset, your home. Advice from a trusted and experienced financial advisor before you borrow against your home can help you decide if this tool is one you can use to advance your financial position.

 

Home improvements: How about those home improvements you’ve always wanted? Repairs and upgrades to your home can increase your home’s value, not to mention making it more energy efficient, safer, and nicer to look at. And if you are still kind of playing with the concept of “eventually” selling and moving, it’s money well spent to prepare your house for sale. Just a note of caution here, if you want to spend equity dollars to prepare your house to sell, just make sure you apply for the loan before you put the house on the market.

Education: Home equity, especially if your income is too high to qualify for grants, scholarships, or student loans, is one way to pay for tuition and fees for your kids.

Debt consolidation: Often people run up a large debt on their credit cards, and using their home equity is one way to consolidate that debt and reduce monthly interest charges and payments. A cautionary note: If you aren’t disciplined enough to ignore the temptation to run up the credit card balances again, you could end up with and even larger debt and no equity. 

Purchasing other real estate: Having an approved line of credit available for immediate use puts you in a good position to make a down payment on a second home, or investment property, without waiting for a new loan to be approved.  You never know when that perfect opportunity will present itself and you want to have the money available on a moment’s notice.

 

Medical or other unexpected major expenses: An equity loan can be an answer to your prayers if you are hit with major medical bills or you lose your job. When you’re unemployed is NOT the time to go to your lender to ask for an equity loan! Plan ahead, get approved now. You don’t have to use the money until or unless you need it.

 

Big ticket items: If you’ve checked recent auto or personal loan rates, you may see that lower interest rates and tax advantages also make equity loans an option when financing a car, boat or other high-priced purchase.  

A Final Note of Caution: Consider using other resources besides your equity to pay for some of these items – savings, 401(k), IRA, or stocks and bonds are a few options. When you use your equity to pay for living costs incurred when you were unemployed, for medical care, or for big-ticket items, you could find yourself in a risky situation if bankruptcy ever came knocking at your door. In a Chapter 7 bankruptcy, you can walk away from unsecured debt, such as credit card balances (which you may have used for your living and medical costs). But if you’ve used your house as collateral to secure those debts, you will have no way to avoid paying them. And if you can't make the payments, the lender could foreclose on your house, and until all the creditors are paid you will not have access to any of the proceeds from the sale. Get good financial advice!

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To find out if a Home Equity Loan is right for you, call me at (510) 375-0296. There is no obligation, and this is not an offer to lend. Follow this link for more information about our mortgage division of Mission Real Estate & Mortgage.