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.
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?
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.
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.
Wrapping It All Up
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.