When the bills are piling up and there doesn?t seem to be any
way out, a home equity loan can seem like the answer to your
prayers. Home equity loans can also be a great way to jumpstart
a business or investment portfolio. However it?s important to
realise that in some circumstances, a home equity loan may in
fact make your life a whole lot worse.
A home equity loan is like a second mortgage on your home. If
your home is currently worth $130,000, and you have a mortgage
against it for $70,000, then you have $60,000 of equity
available. Some home equity loans may allow you to borrow up to
80% of your home?s value, others may go higher in special
circumstances. In this example, you would be able to borrow
another $34,000 as a home equity loan and still have only
borrowed 80%.
Before making the decision to borrow more, though, it?s
important to sit down and really think about what you?re doing.
Firstly, and most importantly, why do you want the money? This
is a really crucial part of your decision making. Many people
use a home equity loan to fund necessary repairs to their home,
or make improvements and so improve their home?s value. In that
situation, a home equity loan is a great idea, as the extra
borrowings will most likely be offset by the increase in your
home?s value ? as long as you can afford the extra repayments.
Borrowing to fund a business may also be a good use of home
equity loan funds. It?s important, though, not to put your money
into a business without any track record, because you may well
be throwing it away. Also, never use a home equity loan to try
and resurrect a business that?s losing money rapidly. You?ll
just end up with a bigger mortgage payment headache and nothing
else. But if you have a business that is thriving and
desperately needs some funds to expand, a home equity loan may
well be the solution if banks aren?t interested in giving you
standard business finance.
Investing is another possible use of your home equity loan
funds. Again, it?s important to think carefully about what you
plan to invest in. You could use the home equity loan as a
deposit on an investment property. Or you could use it to be
good quality shares. You may well regret it, though, if you buy
the latest hot tip speculative share! Choose carefully and
wisely, and a home equity loan can be a great way to start your
investment portfolio.
Debt consolidation is another popular reason for taking out a
home equity loan, and can be beneficial, but only if done
wisely. There?s no point increasing the debt on your home to
clear your credit card debt, only to turn around and spend,
spend, spend until all your cards are at their limits again. You
need to close all of the cards as soon as they?re paid off, or
only keep one with a small limit for necessary purchases.
There are other reasons for a home equity loan which can make it
a useful source of funds, but in these situations it?s really
important to be sure that you have no other options, and you can
afford the repayments. These may include educational expenses,
unexpected medical expenses or a family emergency.
There?s also one reason that is very rarely a good reason to put
your family home in further debt ? big ticket items. Maybe it
will feel really good to have that long vacation, or buy that
expensive television and furniture, but ask yourself if it?s
really necessary or important. If spending the money on
unnecessary things means that somewhere down the track you lose
your home, you?ll have paid for those things with a lot more
than money.
If you think carefully about a home equity loan, and assess your
reasons for borrowing more against the family home logically
rather than emotionally, then you will be able to make a
sensible choice. A final thought ? always assess your ability to
repay the loan based on reality and perhaps even ?worst case
scenario? values, rather than optimistic estimates of overtime
at work or a promotion. That way you?ll be able to make the
payments and enjoy your family home for many more years to come.
Copyright Felicity Walker 2005
About the author:
Investing and finance are two passions of the author. To find
out more, check out
ref="http://www.homeequityloanzonecentral.com">http://www.homeequ
ityloanzonecentral.com for more information.
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