The Do's and Don'ts of Home Equity Loans

With home values rising, homeowners who have equity, a much-valued resource, might be tempted to tap some of that wealth and use it for other purposes. But depending on your personal situation and how you’d like to use the equity, it may not necessarily be the right thing to do.

Here’s when a home equity loan, which allows you to use the equity of your home as collateral, makes sense — and when it doesn’t.

DON’T: Fund a lifestyle

Remember a decade ago when homeowners yanked cash out of their homes as if they were bottomless piggy banks to fund affluent lifestyles they couldn’t really afford? These reckless borrowers, with their boats, fancy cars, lavish vacations, and other luxury items, paid the price when the housing bubble burst. Property values plunged, and they lost their homes.

Lesson learned: Don’t squander your equity! A home equity loan should be looked at as an “investment,” and not as “extra cash” when making spending decisions.

DO: Make home improvements

The safest use of home equity funds is for home improvements that will add to the home’s value. If you have a one-time project (for example, you need a new roof), then a home equity loan might make sense.

Need access to money over a period of time to fund ongoing home improvement projects? Then a home equity line of credit (HELOC) would make more sense. HELOCs let you pay as you go, and usually have a variable rate that’s tied to the prime rate, plus or minus some percentage.

DON’T: Pay for basic expenses/bills

This is a no-brainer, but it’s always worth reiterating: basic expenses like groceries, clothing, utilities, and phone bills should be a part of your household budget.

If your budget doesn’t cover these and you’re thinking of borrowing money to afford them, it’s time to rework your budget and cut some of the excess.

DO: Consolidate debt

Consolidating multiple balances, including your high-interest credit card debts, will make perfect sense when you run the numbers — who doesn’t want to save potentially thousands of dollars in interest?

Debt consolidation will simplify your life, too, but beware: It only works if you have discipline. If you don’t, you’ll likely run all your balances back up again, and end up in even worse shape.

DON’T: Finance college

This may seem like an attractive use of home equity for those with college-age children. However, the potential consequences down the road could be significant. And risky.

Remember, tapping into your home equity may mean it takes you longer to pay off the loan. It also may delay your retirement, or put you even deeper in debt. Furthermore, as you get older, it will likely be more difficult to earn the money to pay back the loan. Don’t jeopardize your financial security.

Source: Zillow Blog, Vera Gibbons
http://www.zillow.com/blog/dos-donts-of-home-equity-loans-192836/

4 Reasons To Refinance Now. . . And 4 Reasons Not To

By the way, I know of a great loan officer who can help you with a refi or purchase money loan. . .

A nicer car. Some new furniture. A family vacation. Or a bigger, fatter savings account every month. They're just a few of the things you've been thinking about since you learned you can save a couple hundred dollars per month by refinancing.

We get it. That new low interest rate is tempting. But is refinancing really right for you? If you're only thinking about what you can buy with the money you'll save, the answer might be no.

"Whether or not refinancing makes sense for you comes down to a simple test: "It's only a great time to refinance if you're going to save money by refinancing and if it works with your long—or short-term—financial goals, said Fred Arnold, a mortgage professional and president of the Association of Mortgage Professionals, on Yahoo.

WHEN TO REFINANCE

1. To lower your interest rate

"One of the best reasons to refinance is to lower the interest rate on your existing loan," said Investopedia.

"Historically, the rule of thumb was that it was worth the money to refinance if you could reduce your interest rate by at least 2%. Today, many lenders say 1% savings is enough of an incentive to refinance."

People who refinanced a few years ago may also want to think about doing it again. "If they refinance now, they could lower their rate by 1 percent," said Diane George, founder of Vault Realty Group, a brokerage in Oakland, California, in Money magazine. "For example: A $450,000 loan with a 4.75 percent interest rate refinances into a 3.6 percent interest rate and will have a savings of an estimated $300 a month."

2. To shorten your loan term

Historically low interest rates have enticed many a homeowner to refinance in order to shorten the length of their loan—often trading in a 30-year fixed-rate loan for a 15-year term. Depending on the rate, homeowners can cut their loan term nearly in half without a huge jump in the monthly payment. Check out Bankrate's calculator to compare rates on the two loan types.

3. To get a fixed-rate mortgage

If your loan is adjustable and you're looking to get a fixed rate with payments that remain the same every month, a refi is a good idea, say experts. "While ARMs start out offering lower rates than fixed-rate mortgages, periodic adjustments often result in rate increases that are higher than the rate available through a fixed-rate mortgage. When this occurs, converting to a fixed-rate mortgage results in a lower interest rate as well as eliminates concern over future interest rate hikes," said Investopedia.

4. To use your home equity to pay off debt

If your home has risen in value while you've been making your payments and interest rates have dropped, you may have a nice chunk of equity in your home. Tapping that equity to pay off existing debts may make good financial sense—especially when the interest rates on your credit cards and store accounts are higher than the rate offered by your refi.

WHEN NOT TO REFINANCE



1. Because you want to cash out all that equity and buy a boat. Or an island

If there's one thing we learned from the real estate crash, it's that treating our homes like a discretionary spending account can be dangerous. Mortgaging yourself to the hilt and spending the cash on items that don't appreciate or that are risky could spell disaster—that's if a bank will even approve the refi.

It's also important to remember that our human nature may not change just because we were able to bail ourselves out.

"Unfortunately, refinancing does not bring with it an automatic dose of financial prudence," said Investopedia. "In reality, a large percentage of people who once generated high-interest debt on credit cards, cars and other purchases will simply do it again after the mortgage refinancing gives them the available credit to do so. The possible result is an endless perpetuation of the debt cycle and eventual bankruptcy."

2. Because your credit has declined

A refi requires lender approval, which means your credit will be checked. If you know those delinquent credit accounts and overdue car payments have killed your credit score, you might want to wait. Get your free credit report to check your score and ask your lender for options. They might recommend a credit repair program or a streamline refi if you are eligible.



3. When the numbers just don't make sense

A lower interest rate means a lower payment, which means you're saving money…right? Not necessarily.

"One of the most important details you need to pay attention to when you're planning to refinance is the break-even point. This is the amount of time it will take for you to recover the closing costs on the new loan. The break-even point is calculated based on how much you pay in closing costs and what your new interest rate will be," said smartasset. "If you're planning on moving before the break-even period ends, refinancing probably doesn't make much sense since you won't be reaping any significant financial benefits in the long run. Typically, closing costs average between 2 and 5 percent so it could take several years for you to get back to even. For example, if you pay $3,000 in closing costs and your payment only drops by $50 a month, it'll take 60 months before you break even."

4. Because it adds years to your mortgage

If you dream of nothing more than paying off your house and being free and clear, refinancing won't get you there since it typically adds to the length of your loan (The exception is if you're refinancing into a shorter term.).

"Increasing the number of years that you owe on your mortgage is rarely a smart financial decision," said Investopedia. "A savvy homeowner is always looking for ways to reduce debt, build equity, save money and eliminate that mortgage payment. Taking cash out of your equity when you refinance doesn't help you achieve any of those goals."

Source: RealtyTimes, Jaymi Naciri
http://realtytimes.com/consumeradvice/mortgageadvice1/item/38169-20150910-4-reasons-to-refinance-now-and-4-reasons-not-to

Credit Knowledge And Confidence

A Guide to 3 Equity Loan Options

Determining which type of equity loan to take — second mortgage, HELOC, or cash-out refi — comes down to a number of factors, including why you need it.

Here’s how to start determining whether borrowing against your house in the form of a cash-out refinance, a home equity loan, or a home equity line of credit (HELOC) makes sense for you. Which you choose depends on your circumstances, interest rates, and the purpose of the equity loan. In some cases you might even be better off choosing none of the above.

1. Cash-out refinance

In a cash-out refi, you pay off your old mortgage and take out a new one that includes the amount you wish to borrow plus settlement costs. Because it’s a first mortgage, the interest rate is often lower than you’d find on a second mortgage. Just make sure that the lender isn’t adding “junk fees” for things like courier services that are unusually high for your state.

A good rule of thumb: If the cash-out refi’s interest rate is lower than the rate on the existing mortgage, it’s likely to be cheaper to borrow this way than to take out a second mortgage. If it’s higher, retain the lower rate on the existing mortgage and explore other loan options. A typical refi takes two to four weeks once you give the lender the required paperwork.

2. Home equity loan

With a home equity loan, a second mortgage on top of your first mortgage, you borrow a lump sum of money that you pay back over a set number of years, either at a fixed rate or at one that adjusts after a certain period. If you fail to make your payments, the lender can foreclose on your house.
Rule of thumb: Consider this option when you have a good idea of exactly how much money you need to borrow. If you require the money for a new car, for instance, just be sure the terms are more favorable than those you’d get for an unsecured auto loan from a credit union. Settlement costs are similar to a first mortgage, though sometimes a lender will waive some fees if you are paying off an existing first mortgage that you already have with that company. The average closing costs on a $200,000 mortgage are $4,070.

3. Home equity line of credit

A HELOC has an adjustable interest rate that can go up or down when the prime rate moves. Banks use the prime rate as a base to set lending rates — prime plus 2%, for example. HELOCs are open-ended, like credit cards, so you can borrow money up to your credit limit as needed, say, to pay for stages of a home renovation.
Rule of thumb: Shop around for HELOCs that have no annual or cancellation fees and no mandatory average balances or withdrawal requirements. Annual fees can hit $100 or more; cancellation fees, $350 to $500. Like credit cards, HELOCs can be closed by the lenders at any point. If that happens, you lose access to your line of credit. Be prudent about what you borrow. Just because you can borrow up to your credit limit doesn’t mean you should. If you can’t make your payments, you could lose your house.

Is an equity loan right for you?

It’s not hard to calculate, at least roughly, the equity available in your home. Simply subtract the amount you owe from the home’s current market value, as determined by an appraisal or by sales prices of comparable homes. A real estate agent can give you an “opinion of value” to help you pinpoint the price; you might also want to check a website like realtor.com for an estimate of your home’s value.

But remember that as the market changes, so does your home’s equity. Lenders can restrict your borrowing power accordingly. As housing values fell in 2008 and 2009, many borrowers found their HELOCs suddenly frozen, even if they were in the middle of a home renovation.

Easy money was partly responsible for the housing bust, and lenders overcompensated in tightening credit in the aftermath. You can’t do much about either scenario. But you can be proactive about figuring which product is right for your situation.. Any decision should take into account not just how much equity is available, but also your ability to pay it back. Look at your spending habits, your emergency cash reserves (you should have at least six months’ worth), and your credit score. You should dedicate no more than 28% of your gross income toward repaying your home loans.

Unlike credit card debt, all three types of equity loans discussed here are secured by your home, which you may lose if you don’t pay up. Moreover, if you lose your home in a foreclosure or short sale (when a home is sold for less than is owed on the property), you may still be on the hook to the lender for any money that you owe from your second mortgage.

So before committing, be sure to explore other avenues for funding — like tapping savings, applying for a government-sponsored student loan, or borrowing from family or friends — to meet your particular needs.


Source: HouseLogic, June Fletcher
http://www.houselogic.com/home-advice/equity-loans/equity-loan-options/#ixzz3WSxX0kNA