Most Americans hope to one day own their homes outright, which would be part of their retirement savings. But for many people, this dream is getting further and further away as they spend their home equity savings.
Gary Miller, who has worked in the credit industry for 25 years and is CEO and co-founder of FirstAgain LLC, a financial services company based in San Diego, California, says, "I am surprised by how many of our loan applicants, including many of our customers with excellent credit, have taken equity out of their homes in the last few years through cash-out refinances or home equity loans." "Now that home prices have gone down in many parts of the country, these people have bigger mortgages and often less equity. This makes it harder and takes longer for them to become debt-free homeowners."
Before you decide to take out a loan against the hard-earned equity in your home, think about the following:
- Are you thinking about getting a HELOC (home equity line of credit)? This product is marketed like a credit card, with adjustable teaser rates, ease of use, and other perks that encourage you to use your home equity for almost anything over a long period of time. Be careful. Having a HELOC may be a good idea for some things, like an emergency in the future, as long as you don't use it too often and pay it back quickly when you do.
- Are you using your home equity for something that actually adds value (equity) to your home, like a remodelling project or a swimming pool, or for something important in your life, like a child's education or unexpected medical bills? This can be a smart way to pay for these kinds of costs. Home equity loan rates are good, and if you itemise your taxes, you can often deduct the interest. But if you use your home equity to pay for vacations or bills, you may be taking on more than you can handle.
- Cash-out refinancing can make sense if you improve your mortgage terms overall and use the cash for a good reason. Again, if you can, try to shorten the length of your loan.
- Are you using a home equity loan with a fixed interest rate and the shortest term you can easily handle? Adjustable rates may make sense for people who have a lot of money and know a lot about money, but for most people, a fixed rate and a fixed monthly payment are better because they avoid payment shock in the future. If you pay off your loan faster, your home equity will grow faster. Think of it as being made to save.
- If you have good credit, you may be able to get a low-interest loan that doesn't require you to put up your home as collateral. This type of loan, like FirstAgain's AnythingLoan, has fixed interest rates that are very competitive and a level of ease of use that you can't get with mortgage products. You can apply online without any paperwork in the morning and have between $10,000 and $100,000 in your account by the afternoon. Getting a mortgage loan takes days, but this only takes minutes.
"Because of the recent subprime meltdown, the lending environment has become more difficult," says Miller. "As a result, home equity products have become more expensive and harder to get as lenders tighten their credit criteria and loan-to-value rules." "Our product is a great choice for people with good credit who don't have access to a home equity loan."
