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When is a Home Equity Loan the Right Choice for Me?
Author David Schneider | Dec 03,2007
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Especially with the dramatic increase in house values that the country has seen in recent years, many homeowners are utilizing equity lines to tap into the equity that they have their homes. While equity lines are considered a mortgage lien on a property, many borrowers see an equity line as a source of cash. So, how do you know if an equity line is right for you?
How You Use the Cash
The first thing that you should consider when you are thinking about taking out an equity line on your home is what the intended use of the money is. Debt is a lot like cholesterol -- there is good debt and there is bad debt. If you are going to use the equity line to consolidate debt and pay off bad debt like credit cards, then an equity line is probably the best way to go. Equity lines are usually fully tax deductible, which makes them a form of good debt. Now, if you are using the equity line to go on a spending spree and push yourself further into the bowels of debt, then you should not take out an equity line on your property.
Interest Rates
Another area that you need to consider is the rate that you currently pay on your first mortgage and what the interest rate will be on the equity line. Equity line interest rates are usually much higher than regular first mortgages, like a 30-year fixed or an adjustable rate mortgage. You need to make sure that you will be able to cover the extra payment that is associated with using an equity line of credit.
If you have a very high interest rate on your first mortgage and can get a lower interest rate if you were to refinance now, then you may want consider doing a cash-out refinance on your first mortgage instead of an equity line of credit. A cash-out refinance allows you to refinance your first mortgage and at the same time access the equity that you have built up in the home. Where an equity line allows you to access the cash as you need to use it, a cash-out refinance will give you the cash in a lump sum amount. And where an equity line only requires a payment on the cash that you have accessed, a cash-out refinance will require that you make payments based on the full amount of the mortgage -- both the original first mortgage amount and the cash equity that you received at closing.
When You Will Use the Cash & How You Need to Access It
Another important item that can help you decide between an equity line or a cash-out refinance is when you need to use the cash. Will you need the entire amount at one time? Or will you need some of the cash now and some later? Since most equity lines are accessed by the borrower using a check or a debit card, the borrower “draws” money from the equity line or line of credit as they need it. With a cash-out refinance, you receive the money in a lump sum and you start paying interest right away. This is fine if you are using the money all at once.
So if you have a high interest rate on your first mortgage and need to access the equity in your home, then you may want to consider a cash-out refinance to pay less interest overall. If you have a low interest rate on your first mortgage and you only need to access the equity in your home a little bit at a time, then you may want to consider doing an equity line on the property. You should talk with your tax advisor to review your personal financial situation before deciding either way.
Especially with the dramatic increase in house values that the country has seen in recent years, many homeowners are utilizing equity lines to tap into the equity that they have their homes. While equity lines are considered a mortgage lien on a property, many borrowers see an equity line as a source of cash. So, how do you know if an equity line is right for you?
How You Use the Cash
The first thing that you should consider when you are thinking about taking out an equity line on your home is what the intended use of the money is. Debt is a lot like cholesterol -- there is good debt and there is bad debt. If you are going to use the equity line to consolidate debt and pay off bad debt like credit cards, then an equity line is probably the best way to go. Equity lines are usually fully tax deductible, which makes them a form of good debt. Now, if you are using the equity line to go on a spending spree and push yourself further into the bowels of debt, then you should not take out an equity line on your property.
Interest Rates
Another area that you need to consider is the rate that you currently pay on your first mortgage and what the interest rate will be on the equity line. Equity line interest rates are usually much higher than regular first mortgages, like a 30-year fixed or an adjustable rate mortgage. You need to make sure that you will be able to cover the extra payment that is associated with using an equity line of credit.
If you have a very high interest rate on your first mortgage and can get a lower interest rate if you were to refinance now, then you may want consider doing a cash-out refinance on your first mortgage instead of an equity line of credit. A cash-out refinance allows you to refinance your first mortgage and at the same time access the equity that you have built up in the home. Where an equity line allows you to access the cash as you need to use it, a cash-out refinance will give you the cash in a lump sum amount. And where an equity line only requires a payment on the cash that you have accessed, a cash-out refinance will require that you make payments based on the full amount of the mortgage -- both the original first mortgage amount and the cash equity that you received at closing.
When You Will Use the Cash & How You Need to Access It
Another important item that can help you decide between an equity line or a cash-out refinance is when you need to use the cash. Will you need the entire amount at one time? Or will you need some of the cash now and some later? Since most equity lines are accessed by the borrower using a check or a debit card, the borrower “draws” money from the equity line or line of credit as they need it. With a cash-out refinance, you receive the money in a lump sum and you start paying interest right away. This is fine if you are using the money all at once.
So if you have a high interest rate on your first mortgage and need to access the equity in your home, then you may want to consider a cash-out refinance to pay less interest overall. If you have a low interest rate on your first mortgage and you only need to access the equity in your home a little bit at a time, then you may want to consider doing an equity line on the property. You should talk with your tax advisor to review your personal financial situation before deciding either way. |
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