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5 Questions To Ask Before You Tap Into Your Home Equity

April 14th, 2017 8:58 AM by Jackie A. Graves, President

Need 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 questions.

Is this just a quick fix for more spending?

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.

Is the borrowing really worth it?

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.

How should I tap my equity?

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 years.

How long do I want to be on the hook?

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 of dollars.

What are my other options?

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 lenders offer 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.

By Gili Malinsky - To view the original article click here


Posted by Jackie A. Graves, President on April 14th, 2017 8:58 AM


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