First, what is a home equity loan? Well a home-equity loan is a second lien against your home’s equity.

I always consider my home equity as a safety net for those difficult times, such as, a job loss or family illness. My rule of thumb for debt management has always been centered on how much equity I had in my house. I would never have my debt exceed my equity.

Now let’s get back to the question. Is a home equity loan a good idea? If you manage your money wisely home equity loans are a good idea but only if you spend the proceeds on items that are a necessity and carry a higher interest rate that the home equity loan. A good example would be home improvements or educational needs. These items usually are quite expensive and require long pay-off periods. By using your equity you will be able to write-off your purchase interest on your federal and state taxes. Another example would be to pay-off high interest credit card and personal loans debt but you must make sure that once the debt is paid you can not accumulate any more credit card debt or you will become financially strapped.

Below are some guidelines if you’re thinking about borrowing against your home’s value:

Don’t waste the cash. Please be aware you’re attaching a new lien on the home, moving closer to the risk of foreclosure. If you do not make your payments on time, the lender has the right to foreclose on your home.

Don’t accumulate more debt than you can handle. As I mentioned earlier your total debt should not exceed your homes total equity.

Evaluate the tax benefits carefully. Review the IRS Publication 936 for details.

Avoid lines of credit unless you have the discipline to make the principal payment on time.

In conclusion:

It is important to carefully consider how you plan on using the equity in your home. If it is for home improvements, education like college or medical expenses then you are adding even more value to your home and personal growth and well being, which is good. If you are using it for daily spending, vacations, cars or other items that quickly depreciate in value, then you could be risking your nest egg and run the risk of owing money on your home far longer that the average 15-30 year mortgage.

By: Dennis Watson

When the month continues to live on well after the money is spent, a very logical approach is to utilize the equity in your home to alleviate the pressure. But is this a good idea or a bad one? Take a look.

Consolidating may free up your dollars, but at what cost? Usually consolidating debt only prolongs the agony. Clearly it ends up creating a far greater cost because the time to pay a debt off is increase, which also means far greater compound interest applied to the debt.

But more than this, clients should be asking themselves what caused this problem in the first place. If no corrective action is taken, all that will have been accomplished is creating a set of circumstances destined to end in financial disaster as the client get further and further into debt.

When using the equity in your home to pay off high interest cards, the alluring feature is oft times a lower interest rate. If I am paying 19% interest on a credit card, a 12 % home equity is certainly appealing. But consider this. You are taking unsecured debt (i.e. credit card debt) and converting that unsecured debt into debt secured by your home… a very dubious financial maneuver. With a secured debt if you default on your payment, a higher interest rate may be the least of your problems. Now you could loose your home!

But there is another method worth considering. A Debt Management Program (DMP) through a proven debt-counseling agency could be a viable alternative especially if initiated at the first signs of trouble. Instead of taking out a new loan, a DMP sets up creditor a program that allows repayment at a lower rate. (See Results to see what your DMP program will look like.)

This should be a no-brainer though picking the right agency may take some investigation. Most agencies do not mention that they do not establish the payback formula as suggested at the above link. It is the same regardless of which agency you use. So there is simply no mystery involved as to what any agency can do for you.

The difference in agency is how flexible are they in meeting your needs, their track record and their procedural follow through. As a consumer, I would question or research each category beforehand.

1. Ask them specifically how flexible they are working with a client. Insure they offer very specific examples.


2. What is their success rate? Does the Better Business Bureau have numerous complaints about them? Has anyone you trust referenced them to you?


3. Ask the perspective agency about their procedures:

a. How often are checks dispersed? (It should be daily but routinely it is only every 2 weeks.)


b. If a creditor does not respond to a DMP proposal, how soon does the client follow-up?


c. Are billing dates adjusted so as not to create a late status?

One other area to be considered is simply how comfortable are you with the perspective agency? Does their proposal make sense to you? Are you more likely to come out further ahead with a home-equity loan or a debt management program?

By: Michael Killian

Your home is truly an asset. If you manage to build up sufficient amount of equity around it, then you could go for a home equity loan. However, be sure to know the costs that come along with it.

Additional costs

Most home equity loan schemes come with attractive discounts and lucrative offers. However most borrowers do not realize that while initially the costs may seem lesser, from a long term perspective, the costs can work out to be quite a lot. For instance, the closure fees are usually quite steep in the case of the home equity type of loan. Even the associated fees and expenses can be much higher than regular loans in the market. Most often lending institutions hike up these rates in order to compensate for the lesser rate on interest. In addition to these fees and associated expenses, the borrower also needs to pay the interest for a period of time.

Tax deductible

One of the main advantages of a home equity loan is that the interest on it is tax deductible. You can consult with the accountant in your office in order to get a better idea of how it works. This can really work to your advantage if you plan on borrowing a small amount. This can save you a much higher amount as opposed to a regular line of credit that doesn’t work up that much savings. This is of course taking into consideration the closing costs as well as all associated fees of the loan.

Tenure of the loan

Another aspect that will largely determine the overall costs of a home equity loan is the duration of the loan. You may be misled into thinking that stretching the repayment over a longer term can result in smaller monthly payments and save you money, but it is actually the other way round! The longer the overall duration of the loan repayment period, the more costly it can work out to be in the long term. It is primarily because you end up paying interest for a much longer duration. This often exceeds the original sum of the mortgage. So while a shorter loan duration will result in larger chunks of payment each month, it is still much cheaper when considered on a long term basis.

Home equity loan vs. line of credit

Many people tend to get confused between a regular home equity loan and a home equity line of credit. However, the two are quite different. In the case of the loan, the interest rate is usually fixed while in the case of the line of credit, the interest rate is of the adjustable variety. This means that the interest rates will fluctuate depending on the prevailing market conditions. Thus a subtle difference between going for a loan or a credit line can significantly affect your monthly payments and savings too.

Negotiating

It is always better to be prepared before negotiating with your lending agency. Hence be sure to know enough about prevailing rates and then arrive at a discounted deal.

By: Alan Lim