Home Equity Loan is a lump sum loan taken out on your home equity. Home Equity Loan is a second mortgage that has become quite popular with home-owners, as they saw the value of their homes appreciate steadily during the housing boom.
The lesson from the housing crisis is that you should not take a home equity loan for any expense that will not generate returns. For example, a kitchen renovation or a long due holiday are not good enough reasons to take out a home equity loan.
On the other hand, college education for your children is a good enough reason to take out a home equity loan.
Here are some factors that you should consider when thinking about a home equity loan:
- Has the value of your house risen substantially? Like any other assets, housing prices are also cyclical in nature. If the value of your house has risen substantially in the past few years, then there are good chances that they will come down in the future. Consider this and take out a loan that is substantially lower than your maximum limit.
- How will you repay for your home equity loan? A lot of home equity loans have options to pay very little during the duration of the loan. At the end of the term, you will either need to make a balloon payment or refinance the loan. Such terms and conditions are fertile grounds for getting into perpetual debt. If you don’t have a good plan of getting out of this debt, then it is wise to stay away from it.
- Do you plan to rent out your home? Some home equity plans prevent you from renting out your home. So if you were considering renting out, then make sure you check whether the bank will allow you to rent out, once you take the home equity loan.
- Purpose of the home equity loan? If you are planning to take the home equity loan for an expense like a vacation or a renovation, then it is better to avoid it. The house is the most valuable asset for most families, therefore tapping into it for expenses that can be avoided, eats into what could be your “rainy-day” money.
- Are you willing to put your house on the line? The current spate of foreclosures should make this point really obvious to all. Since, your house acts as a collateral in a home equity loan, the bank can seize your house and sell it, in case of default. So be sure that your ability to repay the loan, amount of the loan and the current market prices are balanced and one of these factors do not create a condition where you may face foreclosure.
These are just some questions that you need to ask yourself, when going in for a home equity loan. Home equity loans are a great souce of money when you really need it. Since, the collateral is your house itself, be sure that you really do need the money.