Home Equity Loans - Friend Or Foe?

by: Max Hunter

Home equity loans are advertised on the airways, newspapers, magazines and just about anywhere else a homeowner may see or hear the advertisement. Some people feel that home equity loans are trouble waiting to happen. Others feel that home equity loans are a key to opening a stronger financial picture and better home.

There is no simple answer to this question. The truth of the matter is that it will depend on you specifically. There are many financial advisors who believe having equity built in your home is equivalent to keeping your money under a mattress. The mattress, however, is non-liquid which means you cannot necessarily get at the money as soon as you need it. They believe that keeping money under a mattress results in your inability to make your money work for you, though they do acknowledge the minimal risk in keeping your equity in such a safe place.

These same advisors would have you consider taking out a home equity loan in order to invest the income. If, for example, you can find a relatively safe investment at a greater interest rate than you are paying on your loan than you will have your money working for you. If, obviously, the interest rate you are paying on your home equity loan is greater than the interest you are earning on the money in the investment than it does not make financial sense.

Another time financial advisors would consider it smart business sense to take out a home equity loan is to pay off higher interest rate loans and credit cards. If your home equity loan is at 8% and you are paying off credit cards at 18% and other loans at 10% or more than clearly it makes economic sense to consolidate your debt through a home equity loan. It is important, however, to factor in closing costs in the decision making process. The closing costs may eat up a great deal of the savings, if not all of it.

There is a risk, however, for some homeowners. For example, there are some home equity loans that give you a checkbook. As you write checks the money is a loan against the equity in your home. This may cause people to overextend themselves unknowingly. Without a definitive plan in mind, a home owner with this type of loan may use the funds for items that do not necessarily make the best financial sense. They may exhaust all of the equity in their home and not have the ability to use the funds for consolidating their debts or making financial investments.

The personality of the home owner is key to making the right decision when it comes to home equity loans. It is also a good idea to speak to a financial professional in order to get a full understanding of your overall financial goals prior to making this important decision.

The structure of the home equity loan is important to. Make sure you pay careful attention to the interest rates and the closing costs. When applying for the loan request a full breakdown of any and all costs associated with the loan. Depending on how old your documentation is (title search, appraisal, etc) you may save money by using them again for the home equity loan. A title search needs to only be updated rather than started from scratch. If, however, a considerable period of time has passed since you first received your home loan than all documentation may have to be obtained from scratch.

It is also advisable to give your home loan officer a strong understanding of what your intent is with the funds. If you want to pay off other debts you can request that the bank prepares checks directly to the lenders you wish to pay off. This will minimize any temptation to then use the funds for other purposes. Some loan packages will require you to do precisely this.

As you enter the wonderful world of home equity loans it is important to have a clear understanding of what you want and expect out of the loan. It is important to do your homework and select the right loan package and understand how it works and its costs and obligations, then you can decide if you wish to home equity or not to home equity.