Some people own property, such as a house, a condominium, or a co-op. If you are one of these people, you may be wondering about Home equity lines of credit and Home-secured credit cards.
First you need to understand what Home equity is. Home equity can be defined as the difference between the appraised value of your Home and the mortgage balance that has not been paid yet. For example, if your Home is appraised at $200,000 and the balance left on your mortgage is $150,000, then the equity on your Home is $50,000.
THE GOOD
The credit limit on a Home equity line is usually set by taking a decided percentage – commonly about 75% of the Home’s appraised value -- and subtracting the amount still owed on the existing mortgage.
Depending on your circumstances, many consumers are able to deduct the interest on their taxes because the loan is secured by your Home.
When determining your actual credit limit, the lender will take into account your ability to repay, your current income, the debts you have, your credit history, and other related financial information.
The good news is these forms of credit can be useful, particularly if you need to make some Home improvements and need a large chunk of capital. Many believe that using property as collateral in order to improve it will result in increasing its value, and therefore it is a fairly safe way to go about accomplishing that goal.
Over recent years, in many parts of the country, property values have increased significantly. This means that the amount of credit made available to you may be greater than you might have thought.
Many property owners have taken advantage of this fact and rushed to get lines of credit that are tied to their property in order to pay for improvements. Many have taken even more money out than they actually needed for such improvements, to cover other expenses or to pay off other debts. Sounds great, right? Keep reading.
THE BAD
OK so you’re intrigued. But there’s some bad news you need to consider. Some lenders give you an introductory low rate, but then increase it significantly.
Home equity loans require you to pay closing costs and other fees, such as attorney’s fees, fees to appraise your property, a mortgage application fee, fees for preparing and filing a mortgage, fees for a title search, taxes, and insurance costs. You may also have to pay points (one point = 1% of the credit limit). Also, you may be required to pay off some kind of maintenance fee or a transaction fee each time you use the credit line. Wow. That’s a lot of money to spend for the ability to get credit.
THE UGLY
For some, this type of credit may be useful. But for many of us, it is inadvisable.
Why? The reason is simple. The possible consequence for you if you fail to make your payments is the loss of your Home by bank foreclosure.
Even if you are the self-disciplined type, you never know what Life brings. We don’t like to think about it, but you may not be able to make the payments you thought you could if emergencies and life’s unforeseen crises happen.
It may not be wise to add the possibility of losing your Home to the list of unexpected catastrophes!
If you do choose to get a Home equity loan, just be sure you are fully aware of the possible pitfalls before you sign on the dotted line.
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