Well, The Cash Is In The Home Itself

Category: Finance, Credit.

So, you have a beautiful home and you are looking to make it even better through improvements. Well, the cash is in the home itself.

But where is the cash for it? Yes, it really is. Home equity is the extent of ownership a home owner has in the home. And the concept of generating cash through your home is called home equity loan. This is a concept that is very popular in the mortgage industry. This is done through home equity loans. Home equity can be used to generate cash when you need it.

So, home equity loans are the mortgage loans wherein you utilize the home equity to get loan for home improvement, debt consolidation etc. Even if you wouldn t dream of running your credit- card balance through the roof, chances are you have no qualms about borrowing heavily against the roof over your head. However, like any type of mortgage loan, you need to get your basics right and look for the best deal on home equity loans. And why not, when you can so effortlessly take out a home- equity line of credit, and draw on, or HELOC it as needed up to a preset limit? To be sure, we ve often said on this Web site and in our magazine that they re good for certain things. They re fast, given booming home, simple and prices, seemingly inexhaustible. But there are ways that these seemingly innocuous loans can come back to bite you.

HELOCs are structured as interest- only loans, so the minimum payments can be enticingly small. Risk No. 1: Those low payments balloon. Currently, someone with a balance of$ 36, 427( the national average) would owe only about$ 200 a month. If you borrowed$ 20, 000 the day you opened the line of credit, you d still owe$ 20, 000 when the interest- only payoff period ends, generally after 10 years. Put the same amount on a credit card charging 13 percent and the minimum would be around$ 1, 00 While a HELOC s interest- only payments feel relatively painless, they have a serious downside: You re not retiring any principal. At that point, you would have to start paying down the principal, which means your monthly payments would spike. Many people do. "The risk is that you make small payments on a big debt forever and never make a dent, " cautions Fritz Elmendorf, vice president of the Consumer Bankers Association.

Of course, you could roll the balance over into a fresh HELOC. The solution: Start paying off the principal in advance by exceeding your minimum payment each month. You may figure that even if interest rates edge up, the hike will barely register on your monthly HELOC statement. Risk No. 2: That low rate rises. But interest- rate moves tend to happen in clusters as the Federal Reserve seeks to get the economy on track. The results are quite visible: On that$ 36, 427 average HELOC balance you d pay about$ 70 extra a month. Since June 2004 the prime rate, which HELOCs are pegged to, has climbed from 4 percent to 25 percent.

If rate hikes continue, as many experts expect, it will be like water torture for HELOC holders. "A quarter point here, a quarter point there, and soon you start to feel the pain of significantly increased monthly payments, " says Keith Gumbinger of HSH Associates, a financial research firm in Pompton Plains, N. The solution: If you expect to take more than three years paying off your debt, skip the HELOC and use a fixed- rate home- equity loan instead. Risk No. 3: You re hit with hidden fees. One of the most onerous is the early- termination fee, aimed at consumers who jump from loan to loan in search of better terms. Increasingly, banks are burying extra costs in the fine print. In response, lenders have begun to charge a fee if a line is closed within a specified period, typically three years.

Usually an early- termination fee is a few hundred dollars. Today more than 60 percent of lenders have early- termination fees vs. around 45 percent in 2000, according to HSH Associates. But some lenders charge a percentage of the outstanding balance or even force people to fork over transaction costs that were supposedly" waived" when the credit line was first opened. The obvious loophole is to keep the line of credit open with a balance of zero or a few dollars rather than closing it down altogether, but lenders have thought of that. Either of these scenarios can end up costing you thousands. Accounts that remain open but unused for a set period( usually one year) get stuck with inactivity fees, typically around$ 5You can also expect to pay an annual fee, again about$ 5 The solution: Shop around for a lender that doesn t impose heavy fees- - or at least be aware of the fees written into your loan and avoid them. Most HELOC tappers assume that some day they ll just sell their home and the loan will effectively disappear.

Risk No. 4: You lose your equity. But there are no guarantees- - and there doesn t have to be a bubble for this assumption to put your equity in danger. Now throw a$ 75, 000 HELOC balance into the equation. Let s say you bought your house for$ 200, 000 but it was recently appraised for$ 300, 00Sell for anything close to the appraised value and you ll reap a tidy profit. Suddenly the local market need only sag a bit and you can be in trouble, unable to net enough on the sale of your home to pay off both the mortgage and HELOC balances. Risk No. 5: You borrow and overspend.

The solution: Leave yourself an equity cushion of at least 20 percent. No question, HELOCs offer better rates than bank loans, credit cards and most everything else out there. In a 2004 survey by Synergistics Research, 57 percent of, based in Atlanta respondents reported using HELOCs for home improvement. But whether they re truly a good deal depends on how you use the money. This can be a sensible use of HELOCs, as can some debt consolidation( cited by 35 percent of respondents) and paying for education( 13 percent) . "If you re going to pull money out of your home, make it count, " says Nan Sabel, a financial planner in Bedford, Mass. According to the Synergistics survey, 13 percent of, for example HELOC holders have tapped the lines for travel or other leisure pursuits.

But what if you are simply siphoning off your home s equity in order to live beyond your means? Bottom line: Your Hawaiian idyll will truly be more than just a memory if you end up paying it off over many years with interest. As we already know, internet is the source of knowledge and information on everything. The solution: Resolve to use your HELOC only for expenses with long- lasting benefits: education, home improvement or debt reduction. And something like mortgage loans is a favorite topic on the internet. There is a lot of information available on all types of mortgages, including home equity loans.

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