Home Equity Loan Advisor

While home equity loans can provide a ready source of cash to pay for home improvement, college, or other expenses, it’s important to consider whether this type of debt is right for you. The question of “should I take a home equity loan?” is an important one to ask yourself before plunging in.

Lenders usually allow you to borrow up to 80% or 85% of the equity in your house. For example, if your house is currently valued at $150,000 (when you apply for a home equity loan the value is determined by an appraiser hired by the bank) and you owe $50,000 on your mortgage, the available equity would be $100,000. You could then get an equity loan of $80,000 to $85,000, depending on the bank.

The advantages of home equity loans are many. Interest on such debt is usually tax deductible, the rates are often lower than for other types of debt such as credit cards, and if you have built up the equity in your home they are easy to get.

While there are clear advantages to home equity debt, there are significant downsides as well. First and foremost, your house is being used as collateral for the loan. If you can’t make the payments, the bank could seize your house through foreclosure and sell it off to pay your debt.

If you’re using your loan to make purchases like vacations or other expenses that don’t increase your wealth, you’re putting your future financial health at risk. As many homeowners have found out recently, homes do not always appreciate in value. When you want to sell your house, if the value has not increased enough to cover the remaining balance of your home equity debt, you will owe more than your home is worth. This is known as being “upside down” on your loan.

If you are “upside down” on your mortgage, you will have to pay off the balance out of your own pocket, which can mean many thousands of dollars and severe financial hardship when you sell.

Also be sure that you can afford the extra monthly payments of additional debt. Just because you have built up equity does not mean you can afford to pay off an additional loan on your house.

In general, it’s best to use home equity debt for things that increase your wealth like house improvements. But beware – not all renovations increase the resale value of your house. Updating your kitchen or adding living space generally do increase your home’s value. Putting in a new swimming pool or installing super-high end fixtures do not.

Like any kind of debt, home equity loans should be approached with care.