Over the past few years many Americans have established lines of credit secured by the equity in their homes or have borrowed a lum sum amount secured by their home. For marginal borrowers this can turn out to be highly risky as it exposes these families to the loss of their homes.
Lenders tend to quickly change colors from friend to foe in times of financial crisis and will “take it away if you can’t pay”.
Prior to mortgaging or refinancing a home you should consider what your families finances would look like if one or more of your family members living in the home lost their job or came down with a serious illness.
How long could you keep the home payments current if there was an unfortunate long term loss of family income?
In spite of the dangers of refinancing or taking out a home equity loan there are times when it may in fact be wise.
Perhaps credit card debt has gotten out of hand. You can get a home equity loan at much lower rates, pay off the credit card debt, and lower your monthly payments, perhaps as much as by 50%.
A word of warning, however. You must not run up your credit card balances once again or you will end up in even worse financial shape than you were to begin with. The second time around trying to carry high credit card debt and a home equity loan payment may be more than painful. It may be financially fatal.
It would be far safer to avoid temptation by cutting up your credit cards and using a debit card instead.
There are other occassions when a home equity loan may be justified. Perhaps you wish to start your own business and are willing and able to take the risk that things may not work out as you plan.
Your home equity will likely be the cheapest source of start up capital that you will find other than going hat in hand to family members. For most families a “friendly” family loan is not recommended as the resulting strife that often takes place if things don’t go as planned causes painful family problems.
Even when all does go well you may get tired of listening to advice from your unofficial business partners.
Perhaps you wish to purchase an existing business, one that should earn you a good income for a long time to come. Again your cheapest source of capital would likely be a home equity loan.
In general, one should consider a home equity loan when the loan proceeds are used to very likely improve ones financial position. This would be a wise use of the loan proceeds.
One should use extreme caution in using a home equity loan to purchase additional consumer goods, say a large expensive flat screen TV set or a new SUV.
The worst example of the use of a home equity loan that I know of was a couple who took out a loan in order to go to the Superbowl. Just think of how much that Superbowl trip will really cost over the years
as interest payments are added in. What a terrible short sighted financial decision.
My advice. Use a home equity loan only to improve your financial position or to raise funds in a true emergency situation. Using a home equity loan to purchase things that will only lose value is a misuse of the loan proceeds that could cost you what is probably your most useful and valuable possession . . . your home sweet home.