June 9th, 2018 10:07 AM by Jackie A. Graves, President
If you’re looking to Refinance
or Buy a Home
click here before rates rise.
against your home equity can
seem like a sound move. Whether you want to pay off credit cards, cover a
child’s college tuition or remodel your house, home equity seems like a
relatively cheap source of money.
But you put
your home at risk if you can’t make the payments. And if you consistently spend
more than you make, you could be squandering an important source of wealth only
to end up deeper in debt in the future.
to consider: The new federal tax law limits the deductibility of the interest
you pay on a home equity loan or HELOC. The law eliminates the interest
deduction for equity loans unless the money is spent to “buy, build or
substantially improve the taxpayer’s home that secures the loan,” according to the IRS.
you take out a home equity loan or line of credit, ask yourself these questions
paying off other debt, have you fixed the problems that caused you to
overspend? If you’re proposing new spending, are you trying to pay for
something you can’t really afford?
borrow against your home, make sure you’re living within your means and not
setting yourself up for more debt.
Use Bankrate’s calculator to help you
decide whether a home equity loan or HELOC is right for you.
How much value will this really add?
majority of home improvements don’t increase the value of a home enough
to cover their cost. Borrowing only a portion of the expense (say, 50 percent)
and paying for the rest out of savings is often a better approach. Using home
equity to pay for your own education or to fund a business can make sense if
your income will rise as a result. Paying for a child’s education should result
in higher income for him or her, but it won’t increase your own.
How high could my payments go?
credit typically have variable rates that start low but can climb over time.
Home equity loans typically have fixed rates and five-year to 15-year payback
periods, while cash-out refinances can have variable, fixed or hybrid rates
(fixed followed by variable) and typically terms of 15 or 30 years. Figure out
the worst-case scenario payment so you understand how much you might be expected
How long will it take to pay off the debt?
If you can
pay off what you owe in five years or less, then a home equity line of credit
may be your best bet because HELOCs are relatively cheap to set up.
back your debt will take you longer than five years, you’ll probably want the
safety of fixed rates and payments. Home equity loans typically offer five-year
to 15-year payback periods.
You can get
even longer payback periods and lower rates with a cash-out refinance, but
refinances come with closing costs that can total hundreds or thousands of
dollars, plus they change the rate on your primary mortgage.
What are my other options?
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