Home Equity Loans
Fact of life: If you are a homeowner, your needs and your money supply seldom seem to march in lockstep. The roof leaks and the fence falls over only when you can least afford to replace them.
At these times, a home equity loan from the likes of Greater Texas or Aggieland Credit Union can help homeowners take advantage of what might be their biggest financial asset: the value of their home.
Here's how it works: Say your home is worth $300,000, and you owe $150,000. If you divide 150,000 by 300,000, you get 0.50. Convert that to a percentage and you have a 50% loan-to-value ratio - that is, the amount you owe on your home loan divided by the market value of your home. A lender that allows a combined loan-to-value ratio of 80% would then grant you a 30% home equity loan, for $90,000.
Sounds great, but let's go over the advantages and disadvantages.
- Depending on the equity in the home, you can borrow a lot of money at once.
- The interest rate will be much lower than the rates available on credit cards.
- Interest on your home equity loan may be tax-deductible , especially if you are using the money on home improvements.
- You have increased your monthly mortgage payment, and because your home serves as collateral, the lender can foreclose if you don't make the payments.
- If the housing market weakens and resale values drop, your added debt can hinder your efforts to sell the home.
- As with your original mortgage, a home equity loan involves closing costs.
And here are some popular uses of a home equity loan.
Make home improvements . This is the best possible use because you enhance your standard of living while also increasing the value of the home.
Buy a car . Transportation is perhaps as essential as the roof over your head, and a home equity loan can provide the money you need. However, because equity loans can stretch out to 15 or 20 years, you might still be paying for the cars years after you've stopped driving it.
Pay for the kids' college . This is a tough one. You could be going a long way toward ensuring your children's future economic security, but perhaps jeopardizing the quality of your retirement. This makes more sense at 40 than at 60.
Consolidate higher-interest debts, such as credit card debt . This can get you out of a whirlpool of painfully high-interest debt. Proceed with caution , however, because again your home is up as collateral, and closing costs could outweigh the reduced interest payments.
Every person's situation differs. What's most important is ensuring your decision aligns with your financial goals.
Lynn Mucken, NerdWallet
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