December 30th, 2019 9:31 AM by Jackie A. Graves, President
be surprised to discover that you have access to an untapped asset in your
home. In fact, Americans have about $1.5 trillion in home equity available to them. That
money is sitting there, waiting to be unlocked.
equity you’ve built up over time might be available to help you reach financial
goals or improve your current situation. However, just because the money is
there, it doesn’t mean you should tap into it. There are risks associated
with getting a home equity loan or line of credit.
the questions to ask before tapping home equity.
1. Am I living beyond my means?
the most important questions to ask yourself before tapping home equity
requires you to take a hard look at your situation and where you stand. A home
equity loan can help you consolidate and pay off debt, but if you haven’t fixed
the problems that cause you to overspend, you could be in a worse situation.
equity borrowing, when prudently utilized, can be a low-cost source of funds
for homeowners that are equity-rich but cash-poor,” says Greg McBride, CFA,
Bankrate’s chief financial analyst.
you borrow against your home, make sure you’re living within your means and not
setting yourself for more debt.
2. How much value will these home improvements add?
plan to use the money to remodel your home? Consider the value you’re really
getting from a home equity loan. Unfortunately, the vast majority of home
improvements don’t increase the value of a home enough to
cover their costs. This issue can be magnified if home values slide after
you’ve done the remodel.
risk is that any default can result in a foreclosure,” says McBride. “But even
if you keep current with the payments, you can still find yourself owing more
than your home is worth should home values slide.”
making home improvements, recognize that you might not get the value you need
out of your home. Borrowing a portion of the expense (say 50 percent) and
paying for the rest out of savings might be a better approach to avoid getting
in over your head for improvements that won’t return their value.
3. Does this home equity loan help me reach my goals?
have other goals beyond just making home improvements. Using a home equity loan
to fund a business or pay for your education can make sense if your income will
rise as a result. Your home equity loan could provide you with added value down
the road and be a low-cost way to improve your situation.
you need to be careful when tapping your equity for other financial goals. For
example, using a home equity loan to pay for your child’s education may result
in more income for your child, but it could hurt your own finances.
4. Will I get a tax deduction on the home equity interest?
past, one of the questions before tapping home equity revolved around the tax
benefit. Consolidate credit cards with a home equity loan, and you could deduct
the interest on your tax return. Today, that benefit doesn’t apply.
Congress passed a federal tax law that limits the
deductibility of interest you pay on a home equity loan or HELOC to money that
is used to “buy, build or substantially improve the taxpayer’s home that
secures the loan,” according to
rates and changes to the tax-deductibility of the interest have removed some of
the appeal that existed a few years ago,” says McBride.
a home equity loan or HELOC, realize that you might not get the tax break
you’re hoping for.
5. What are the ways I can tap my home’s equity?
three main ways to tap home equity:
Home equity loan: Installment
loan with payments made over a set period of time.
Home equity line of credit (HELOC): Revolving
line of credit based, similar to a credit secured by your house.
mortgage refinance: Involves getting a new
mortgage for more than you owe and then keeping the difference in cash.
equity loans typically have fixed rates and five-year to 15-year payback
periods, while HELOCs generally have variable rates that start low but can
climb over time. A cash-out refinance can have variable or fixed rates, and
typically offer terms of 15 or 30 years. Additionally, a cash-out refinance
might have a hybrid rate, where it starts out fixed but becomes variable after a
6. How much can I borrow using my home’s equity?
general, you can expect to be limited to a total loan amount (your original
mortgage plus your home equity loan or HELOC) of 80 percent of your home’s
value. So, if your home is worth $250,000, your total debt secured by your home
probably won’t go beyond $200,000. If you still owe $150,000 on your home, that
means that you’ll be limited to borrowing $50,000.
Use Bankrate’s calculator to determine
how much you might be able to borrow and estimate your payments.
7. Will a home equity loan impact my credit score?
questions before tapping home equity, don’t forget to consider the impact on
your credit score. Because this is a loan, your payment activity will be
recorded. So, if you miss payments, it could negatively impact your score,
making it harder to get other loans or better interest rates.
your debt-to-income ratio will be affected. Having the monthly payments
associated with your home equity loan will take up more of your income and can
affect your ability to borrow in other situations.
8. How long will it take to pay off my home equity loan?
you take to pay off your loan should determine how much home equity to ask for.
If you can pay off what you owe in five years or less, 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, the safety of fixed rates
and payments might be more attractive. Home equity loans typically offer
payback periods of up to 15 years.
need an even longer repayment period, a cash-out refinance might fit the bill.
However, cash-out refis may come with higher closing costs and they could
change the rate on your primary mortgage.
9. What are the additional costs?
additional costs that might come with tapping your home’s equity. You could end
up paying closing costs, annual fees, home appraisal expenses and taxes. Find
out the costs, how much they could add to the overall debt, and consider
whether you can afford them.
10. Do I have alternatives to a home equity loan?
cases, it makes sense to consider other sources of money before getting a home
equity loan. Here are other potential places to look:
sources of cash. Before you borrow, think about
the resources you already have. Do you have savings, stuff you can sell or
non-retirement investments you can liquidate? If so, using those resources
could make more sense than adding to your debt level.
sources of credit. Credit unions and marketplace
lenders offer personal loans with fixed rates and payments. The federal
government and private lenders offer education loans for students and
parents. Family or friends may be willing to lend you money. You can check
out personal loan rates at Bankrate.com to
see what’s available.
borrowing at all. Vacations, weddings, luxuries
and consumer goods should be paid for out of current income and savings. A
large amount of spending isn’t important enough to justify borrowing against
11. How do I qualify for a home equity loan?
the process is important if you want to get a home equity loan or HELOC
designed to help you reach your goals. After you examine the pros and cons and
want to move forward, it’s time to figure out if you qualify for a home equity loan. Most lenders
base your qualifications on the following factors:
Your home equity amounts to roughly
15% to 20% of your home’s value.
You have an unblemished history of
paying your bills on time.
A credit score of 620 or higher.
The percentage of your monthly
income that goes to paying your debts (debt-to-income ratio) is limited to
36% to 43%.
possible to find some lenders that are a little more flexible, though, so shop
around for your options.
12. Can I get a home equity loan with bad credit?
possible to get a home equity loan with bad credit if
you have outstanding numbers elsewhere. For example, if your debt-to-income
ratio is very low, or if you have a lot of equity in your home, you could still
qualify with poor credit.
you will likely have a much higher interest rate if your credit is bad.
Consider the cost of a higher rate before getting a bad credit home equity
13. How quickly can I get my money from a home equity loan?
the most common questions before tapping home equity relates to how quickly the
process can take place. Every lender is different, but in general, you can
expect the process to take between 30 and 45 days.
cases, a home equity loan or line of credit can be a way to further financial
goals and take advantage of what might be your most valuable asset. However,
there are questions to ask before tapping home equity, and it’s important to
carefully consider whether this is the best move and worth the risk of
potentially losing your home if things don’t go as planned.
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