Here's a piece courtesy of ARA Content. It gets a little sales-oriented at the end, but I thought the information it provided overall (don't keep pulling equity out of your house) was worth the brief infomercial.
Most Americans dream of owning their homes free and clear someday, part of their retirement nest egg. Yet, for many, this dream gets farther and farther from reality as they break into their home equity piggy banks.
“I am somewhat surprised at the number of our loan applicants, even many of our excellent credit quality customers, who have taken equity out of their homes over the last few years via cash-out refinances or home equity loans,” says Gary Miller, a 25-year veteran of the credit industry and CEO and co-founder of FirstAgain LLC, a financial services company based in San Diego, Calif. “Now, with larger mortgages and often less equity, particularly with the recent home price depreciation hitting many areas of the country, these people face a longer and more difficult path to debt-free home ownership.”
Before you decide to borrow against your hard earned home equity, consider the following:
* Are you using your home equity for something that actually adds value (equity) to your home, such as a remodeling project or a swimming pool or for something important in your life such as a child’s education or unexpected medical bills? This can be a prudent way to finance such expenditures. Home equity loan rates are attractive and the interest is usually tax deductible if you itemize. However, if you are using your home equity to finance vacations or pay your bills, think again, as you may be overextending yourself.
* Are you using a fixed rate home equity loan with the shortest term you can easily handle? Adjustable rates may make sense for the financially well off (and financially sophisticated) but for most people, a fixed rate and a fixed monthly payment avoid future payment shock and is the better alternative. Paying off your loan sooner obviously builds your home equity more quickly. Think of it as forced savings.
* Cash out refinances can make sense if you are improving your overall mortgage terms and using the cash for an appropriate purpose. Again, consider shortening your loan term if possible.
* Are you thinking about a home equity line of credit (HELOC)? This product is marketed like a credit card with adjustable teaser rates, ease of use and other incentives, encouraging you to use your home equity for just about anything with long repayment periods. Be careful. Having a HELOC in place may be prudent for certain purposes (for example, a future emergency) if you can be disciplined about not normally using it and pay it down quickly if you do.
* If you have excellent credit, you may qualify for an attractively priced unsecured loan that doesn’t require pledging the equity in your home. This type of loan, such as FirstAgain’s AnythingLoan, offers highly competitive, fixed interest rates and an ease of use not available with mortgage products. Entirely online and paperless, you can apply in the morning and have $10,000 to $100,000 in your account by the afternoon. It takes just minutes versus the days required for a mortgage loan.
“Given the more difficult lending environment caused by the recent sub prime meltdown, home equity products have become both more expensive and more difficult to obtain as lenders tighten their credit criteria and loan to value guidelines,” says Miller. “Our product represents a great alternative for those with excellent credit who don’t have a home equity loan option.”
To learn more about FirstAgain and its AnythingLoan, please visit www.FirstAgain.com.
I'm in the 'who'd do that, its so dumb camp'. I think I'm the sort of person who would hate to get a personal loan, and that's what this would feel like.
Posted by: plonkee | October 20, 2007 at 06:53 AM
Beats renting!
Posted by: Minimum Wage | October 20, 2007 at 08:35 AM
Actually, MW, I think there are a lot of times when renting is the best option. Depends on where you're living, I guess. DC rents (where I live) are high, but we were able to find a place with comparatively lower ones. I have friends who rent a house in Central PA for 600/mo. They couldn't afford to buy one yet, but they still get the comfort of a (little) house. :-)
I'm in the "don't borrow against your house" camp. I know one blogger, Nina at Queercents, who has a HELOC in reserve for emergencies. As long as she keeps it as such, that makes better sense than actively using it.
Posted by: Mrs. Micah | October 20, 2007 at 10:35 AM
Yes, there are definitely times and places where renting beats owning. But in the long run, owning is usually the better option, especially if your housing is modest.
For low earners, owning a modest home can well represent the long-term difference between enjoying a modest retirement and never being able to retire at all because you'll always have to pay rent.
Posted by: Minimum Wage | October 20, 2007 at 11:17 AM
There are only a few reasons for doing it, emergencies, home improvements, other investments, and spending down later in retirement, and even then you have to use commonsense about it
Posted by: Lord | October 20, 2007 at 03:52 PM
I don't think you should use a home equity loan for anything, unless you are facing an otherwise devastating financial situation. The "good" uses seem suspect.
College...um, did you expect your kid to get a full scholarship only to discover 18 years later he was dumb as rocks? Why didn't you save for this? 2 years community college + 2 years state college doesn't cost THAT much (yet).
Home Improvement...seems a little weird to take out a loan and pay interest, just to build more equity into your house. Sure, you could sell the house and reap the benefits (hopefully) but otherwise you're still just paying to borrow money. And now you've got this interest payment eating into your equity gain. Yuck. Why not save, earn interest, and pay cash? What kind of improvement can't wait a few years?
Medical bills...I suppose if it comes between collection calls and a home equity loan, the loan wins, but you should be building an emergency fund to cover at least some of things like this.
HELOC...a low interest revolving line of credit with collateral (your house) is still just a credit card.
Posted by: Chris | October 20, 2007 at 09:49 PM
Wish I had known this five years ago.
Posted by: rocketc | October 21, 2007 at 02:14 PM
Borrowing at low rates to invest in appreciating assets is very worthwhile as long as the rates are really low and the assets will really appreciate more as a result. It is the basis of high power leverage to maximize returns. It doesn't make much sense if the rates are subprime, only you appreciate the investment, or you have little flexibility and have to sell it in a down market.
Posted by: Lord | October 21, 2007 at 02:44 PM