Inside Home Loans

If you have equity in your home and need cash to pay off high-interest credit cards or cover an emergency, then refinancing or getting a second mortgage to tap that equity might seem like a cheap, safe way out of debt. After all, you'll pay less interest on a mortgage or equity loan than on other types of loans, and that interest probably will be tax deductible. Sounds like a good thing, right? Yes and no.

Remember that taking money out of your house is not the same as withdrawing cash from your savings account or redeeming a certificate of deposit. Unlike deposit investments -- which you own and which pay you interest income -- home loans that tap your house's equity are just that: loans. You'll still owe principal and interest to a lender; you've simply shifted the debt to a different lender at a different rate.

There's only one way to get the equity out of your humble abode without having to repay it -- sell the house. Let's say you sell your home for $150,000, and you owe the mortgage company $100,000. You've accomplished three things: you've raised $100,000 to pay off the lender, you've freed up $50,000 in cash equity, and you've left yourself homeless.

Now let's say you have $50,000 of available equity in your home and you either refinance or take out a second mortgage, such as a home equity loan or a home equity line of credit, more commonly known as a HELOC. You still have a place to live and you get your $50,000 in cash, but now you also owe $50,000 plus interest to the mortgage lender.

Freeing the equity trapped in your home to bankroll other uses makes economic sense under certain circumstances, says Catherine Williams, vice president for education for Money Management International, a nonprofit credit-counseling service in Chicago. “It makes sense to tap it once and once only to pay off credit-card or other high-interest debt,” Williams says. However, she advises people to think about what they are really doing, and about how much that low-interest loan will cost them over time. “The thing I point out is that you are moving unsecured debts to secured debt. You are using up the equity in your home to pay for your old tennis shoes and your sister-in-law's shower gift.”

If you do have equity in your house, there is a strong temptation to use it. Many lenders urge you to take out bill-consolidation loans or put your “unused equity” to work for you. If you live in one of the country's “hot” real estate markets where housing prices are soaring, you may have more equity in your home than you realize. The problem, Williams points out, is that hot markets eventually turn cold. There is no guarantee your home will continue to climb in value at the same "hot-market" rate or that it even will keep its current market worth.

In a nation where the savings rate is less than 1.0 percent, millions of people find their homes and the equity in them are the only savings accounts they have. Many people look at their homes a source of retirement income down the road and as a safety net right now.

The problem is that "safety net" means different things to different people, especially as market conditions change. “When home prices started climbing and interest rates began to drop, we actually saw a decrease in the number of people coming into debt management programs because they had a simpler tool to pay their debts," Williams says. "They tapped into their home equity and paid off their debts. Now we're seeing repeat 'tappers.' They tapped once to pay off their credit-card debt, but they didn't learn anything. They kept spending and running up their credit-card debt.”

Many people, hoping that home appreciation will keep up with their spending, run up another $10,000 or more in new credit card debt while they are still paying off their first home equity loan. “If you had a home equity loan and then paid it back, then you are in good enough shape to hit it again," she adds. "It's when you take out another loan and add that debt to an existing home equity loan that you get into trouble.”
You also might be on the road to paying even more money in long-term mortgage interest than you would have on shorter-term credit-card debt. “If you took $15,000 in debt and converted it from an evil 18- or 20-something-percent credit card interest to a 5-percent home-equity interest, and then spread that debt out over 15 or 20 or 30 years, you would wind up paying more than if you had paid it off as credit card debt," Williams says.

“Home equity is supposed to be used when you sell the house so you can make a larger down payment on the next one,” she adds. “Or you use it for home improvements, or you use it once to get out of credit card debt. In some cases you use it to help you take care of aging parents, or maybe for your own retirement.” Home equity is “a form of forced savings,” she says, and that is a good thing.
At some point, all homes will be sold. “What counts is how much you get to keep, not how much you have to pay off. By tapping into your home equity, what you are actually doing is decreasing your own wealth.” And while it does make sense in some cases, running up more credit card debt while you are still paying off a second mortgage isn't one of them.

Used wisely, loans against home equity can be a boon to cash-strapped homeowners. Spent indiscriminately, these same loans can cost you your home and financial security.

Before you buy real estate, educate yourself about what's involved.
Real estate guides are an excellent place to start.

Article Source: http://www.realestate-articles.info

By Hark The Herald www.utah-home-loans.org

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