While cash-strapped homeowners sometimes struggle to make ends meet, our real estate has seemingly morphed into the local bank. We can tap into our home equity for everything from cars to vacations to college funds. Though tapping into your home’s value is one of the smartest ways to borrow money, there are still drawbacks. Moving Forward with Caution Drawing on your home’s equity is often suggested by financial advisers who show that the tax-free interest you pay on a home loan is much lower than what you’d pay on mounting credit card or consumer debt. However, it’s possible to overdo it. While there’s no law that says you have to pay off your mortgage before your retirement, it’s not always pleasant being left with home equity debt once you’ve stopped working. On the other hand, if you retire with a healthy nest egg and lots of home equity, you’ll limit your major expenses and have cash to fall back on. Timing is Critical The best way to access home loan financing while still retaining your retirement savings is to time the loan appropriately. Basically, you want to tailor the loan’s end date to coincide with your expected retirement. You can shorten a loan’s length significantly simply by adding $100 or $200 to your monthly payments. Extra payments can also mean major returns. For example, let’s say you take out a home equity loan with a 7 percent interest rate and you’re in the 27 percent income-tax bracket. After you figure in your mortgage-tax deduction, you’ll still bring in a 5. 11 percent return just by making extra principal payments. Consider the Advantages On top of added returns and despite rising interest rates and retirement risks, home equity loans are still more advantageous than other forms of credit. They offer quick access to funds at a cost that’s at least 5 percent less than a traditional low-interest credit card. In addition, that interest is often tax-deductible. A second consideration when deciding between an equity loan and a line of credit are your monthly payments. Typically, home equity loans offer a fixed rate of interest and a steady monthly payment that’s predictable. A home equity line of credit normally uses an adjustable interest rate that can go up and down with the changing market. So, if you prefer the stability of a steady rate, a home equity loan may be the better option for you. Preparation Ahead of Time Before you commit to a home equity loan, you ideally want to have owned your home long enough to build up equity, not be planning to move soon, have a stable employment situation and actually need the money that a home equity loan can give you. If you’re using the funds to pay off credit card debt, don’t let your consumer debt run back up during the ten or so years it will take you to pay back your equity loan. Finally, make sure you can afford the monthly payments. Any borrowing, especially on a home, needs to be part of a total household plan and worked within your family’s budget.
Posts Tagged ‘Understanding’
Home Equity Can Equal Cash: Understanding Home Equity Loans
December 26th, 2009Home Equity Loan – Understanding the Basics of Home Equity Mortgage
December 21st, 2009Â Â
A home equity loan or home equity mortgage is an effective second mortgage on your home, taken out after you have developed some equity in your home. For example, if you purchase a home for $200,000 and you have paid $40,000 over the years against the loan principal and the market value for the home is now $250,000, you now have equity in the home of $90,000. Â Theoretically, you could apply for a $90,000 loan against the equity, but in practice, most lenders prefer to keep the loan at 80% loan to value or, in this case $187,500. Â In this example, a loan for $27,500 could be approved.
Â
Definitions
Â
Some of the definitions that you will need to be familiar with include equity, mortgage, interest rate, loan fees, loan type, principal and amortization. Â If you don’t understand the meaning of these words and others insist on an explanation from the loan broker or lender. Â You can also do the research yourself so that you are certain you understand the difference between an ARM and a fixed rate loan and why you should choose one or the other, depending upon your circumstances. There are some very good primer level books and classes on almost any subject you can name out on the internet including that of a home equity loan.
Â
Terms
Â
In the case of a home equity mortgage, the word ‘terms’ can mean ‘words’ or it can mean the length of time before the loan is paid off. Â A loan against the equity of your home often will have a longer term than a personal loan. Â You may see terms of 15 years, 20 years, even 30 or 40 year terms on the loan. Â Of course, the longer the term, the more money in interest you will be charged and the larger the percentage of funds you pay are for the privilege of using the money rather than for the money itself.
Â
Rates
Â
The home equity loan rates are also called interest rate or interest. Interest rates are usually structured in one of two ways, although there are other types of loans as well. Â The fixed rate loans set an interest rate up front and it remains in effect throughout the term of the loan. Â The adjustable rate mortgage loan has an interest rate that will vary according to a predetermined index or formula. Â For example the rate may be two point above prime rate, adjustable not more than twice every two years. Â These requirements will vary depending upon the economy of the time.
Â
Advantages and Disadvantages
Â
A home equity loan or home equity mortgage has the advantage of being a lump sum of money that you can use in any way you see fit–presumably legal. Â It has the disadvantage of increasing your debt loan and increasing the cost of money sometimes significantly. For example taking out was is actually a second mortgage on your home may raise your debt to value level to the point where private mortgage insurance is mandated by many lenders. Â This can add thousands of dollars to the repayment amount over the years.
Â
Home Equity Loan – Understanding the Basics of Home Equity Mortgage
December 21st, 2009A discussion of the nature, benefits and operational methods of a home equity loan in simple, easy to understand language is helpful in deciding whether or not such a home equity mortgage should be acquired. A home equity loan or home equity mortgage is an effective second mortgage on your home, taken out after you have developed some equity in your home. For example, if you purchase a home for $200,000 and you have paid $40,000 over the years against the loan principal and the market value for the home is now $250,000, you now have equity in the home of $90,000. Theoretically, you could apply for a $90,000 loan against the equity, but in practice, most lenders prefer to keep the loan at 80% loan to value or, in this case $187,500. In this example, a loan for $27,500 could be approved. Definitions Some of the definitions that you will need to be familiar with include equity, mortgage, interest rate, loan fees, loan type, principal and amortization. If you don’t understand the meaning of these words and others insist on an explanation from the loan broker or lender. You can also do the research yourself so that you are certain you understand the difference between an ARM and a fixed rate loan and why you should choose one or the other, depending upon your circumstances. There are some very good primer level books and classes on almost any subject you can name out on the internet including that of a home equity loan. Terms In the case of a home equity mortgage, the word ‘terms’ can mean ‘words’ or it can mean the length of time before the loan is paid off. A loan against the equity of your home often will have a longer term than a personal loan. You may see terms of 15 years, 20 years, even 30 or 40 year terms on the loan. Of course, the longer the term, the more money in interest you will be charged and the larger the percentage of funds you pay are for the privilege of using the money rather than for the money itself. Rates The home equity loan rates are also called interest rate or interest. Interest rates are usually structured in one of two ways, although there are other types of loans as well. The fixed rate loans set an interest rate up front and it remains in effect throughout the term of the loan. The adjustable rate mortgage loan has an interest rate that will vary according to a predetermined index or formula. For example the rate may be two point above prime rate, adjustable not more than twice every two years. These requirements will vary depending upon the economy of the time. Advantages and Disadvantages A home equity loan or home equity mortgage has the advantage of being a lump sum of money that you can use in any way you see fit–presumably legal. It has the disadvantage of increasing your debt loan and increasing the cost of money sometimes significantly. For example taking out was is actually a second mortgage on your home may raise your debt to value level to the point where private mortgage insurance is mandated by many lenders. This can add thousands of dollars to the repayment amount over the years.
