April 14th, 2017 8:58 AM by Jackie A. Graves, President
to pay off that credit card debt? Or maybe massive college loans? It's easy to
get lost in a sea of debt and look for the nearest available life raft. One
option many people consider is borrowing against their home equity.
But if you can't make the
payments, you could lose your home. Plus, if bad financial habits contributed
to your debt, you could wind up digging yourself an even deeper hole. Before
you start reaching for the equity in your home, ask yourself the following
If you've got problem debt, ask
yourself if the trouble really is a lack of cash or an affinity for shopping.
Before you put your home on the line by borrowing against it, make sure you
know how to live within your means.
If you're looking to borrow
because you want to put money into your home, understand that most home
improvements don't add a lot to a home's value. If you want to use home equity
to pay for higher education or start a new business, the investment might not
necessarily lead to a brighter financial future.
There are three ways to take
advantage of your home's equity:
A home equity line of credit -- HELOC, for short
A home equity loan
A cash-out mortgage refinance
HELOCs tend to have variable
rates that are low initially but can rise over time. Home equity loans usually
have fixed rates and five- to 15-year payback periods. Cash-out refis can have
variable, fixed or hybrid rates (fixed, then variable) with terms of 15 or 30
If you think it will take five
years or less to pay off what you owe, a HELOC is the best bet because those
are relatively cheap and easy to set up.
If you believe it will take
longer, a home equity loan might be your better choice, since they have fixed
rates and payments and offer longer payback periods, typically up to 15 years.
If you think you'll need even
more time, cash-out refinances may offer longer payback periods and lower rates
-- but they do come with closing costs, possibly totaling hundreds or thousands
Don't be too quick to tap your
home equity. Instead, consider:
Alternative sources of cash. Is there a savings account you might tap
into? Is there anything you could sell, like investments, that could cover the
expenses you are looking for? Could you borrow 50% and pay the rest yourself?
Maybe friends or family might be willing to lend you money.
Credit unions and marketplace
personal loans, too, with fixed rates and payments. And there are federal
government and private loans for education.
Borrowing against yourself. Look into taking out loans against your life
insurance or retirement accounts. Make sure to do your research, though. Your
life insurance and retirement accounts are at stake!
Not borrowing at all! Luxuries such as vacations, a high-end
wedding, expensive clothes, and so on, should be paid for with money you
actually have. If you think about it carefully, you'll realize that most
spending doesn't justify borrowing against your home.
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