Wednesday, August 12, 2009
Owing More, Owning Less: A Lesson on Home Equity Loans
A new kind of ATM appeared on streets across America in recent years--one equipped with windows and a doorbell.
To get cash to pay for whatever they wanted to buy, many homeowners tapped their home equity--that is, the value of their homes minus the mortgage amounts remaining due.
Many homeowners now have maxed out their home equity borrowing and have no equity left to tap for future loans. Worse still, some are carrying more total debt on their homes than those homes are worth, if they're in a falling-value market.
Recent years have been rife with examples of how not to borrow against home equity. But home equity loans can be a smart strategy if you have significant home equity, good money management habits, and a stable income.
In borrowing against your home equity, the key is to focus on investment, not consumption, advises Steve Rick, senior economist for the Credit Union National Association, in a Home & Family Finance article. "If you use your home equity to remodel your bathroom or kitchen, that's an investment. You'll get some payback. But if you're just taking out a home equity loan to pay for another trip to Mexico, there's no payback on that cash flow," says Rick.
Using home equity to consolidate debt can be a wise move--if you are disciplined. For instance, you could use a home equity loan to pay off higher-cost debt, such as credit cards.
To help cover the costs of consumer "wants" through savings avenues instead of loans, you'll need to develop a budget and savings plan and stick to it. A counselor at your credit union or financial institution can help. Resorting to other credit sources, such as credit cards, to replace home equity borrowing will lead to even deeper trouble.
To access the full Home & Family Finance story, click here.