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Jan
18

Home Equity Loan or Home Equity Line of Credit?

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Your home is worth a lot. You can tell the home equity folks know this by the numerous ads aggressively promoting home equity loans and home equity lines of credit. They suggest you put your home asset to work. However it can be a great idea? And, if so, which should you choose?

The advertisements are seductive, but remember “all that glitters is not gold.” Both loan options use your home as collateral for a loan. There’s nothing basically wrong with this idea other than the fact that you may be greatly risking your most valuable asset.

Essentially, getting a home equity loan is the same as a second mortgage - a lump sum advance on the money you've already paid in. You borrow a specific amount for a certain period of time and pay back the balance with interest in installments.

A home equity line of credit, on the other hand, is a lot like a having another credit card. The lender agrees to lend a specific amount of money over an agreed period of time and the borrower can draw against this line of credit whenever they want.

In both cases, your home's equity is collateral. Therefore, since the loan is secured, you usually get a lower interest rate than with a credit card. This is the main reason home equity loans are being touted as a great way to consolidate debt. Another benefit is that interest paid on these loans could be deductible on federal and state tax returns.

Sounds good doesn’t it? However, sometimes the disadvantages can be really high.

To begin with, taking a chance on losing your home, by using it as collateral, is risky business. “Borrowers beware,” says the Federal Trade commission. This type of loan is only for homeowners with more than enough steady income to cover the extra monthly payments. And they’re certainly not for anyone who might need to move and sell their home before the second mortgage becomes due.

But that’s not how they’re being advertised, especially on the internet. Unscrupulous lenders promote these packages to the elderly on fixed incomes and to those with low incomes and poor credit ratings. They pretty much offer you any deal you want – whether it’s to your advantage or not – just to get your business. These scammers gamble on people being unable to make payments or to sell their home soon enough.

Then they head in for the kill, start the foreclosure proceedings and take all the money that's been paid into it. Foreclosures in California have doubled in the past year. And this happens everyday – all over the country.

So protect yourself. Always deal with a lender you can trust - preferably a local lender. Don't let the promise of quick cash, easy loan approval or lower monthly payments cloud your judgment. Don't get pressured into signing or making a decision too soon.

Always think it through carefully, get a second opinion and be absolutely clear exactly what you’re getting into. After all, you want to make sure you keep a roof over your head!

Follow this advice and there’s a good chance you can keep your home.

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    September 7, 2010 at 3:54 am (UTC -6)

    Great job! There is obviously many to know about this. I think you also made some good points in features. Just keep working.

  2. Mary says:

    August 21, 2010 at 9:53 am (UTC -6)

    You presented an important warning regarding the continued use of “creative loans” for homebuyers. They are indeed one of the main reasons our country is now facing such financial devastation. One should stay clear of the ARM loans.

  3. William says:

    August 13, 2010 at 9:24 am (UTC -6)

    It’s best not to take up home equity loan, otherwise can never truly own a house.

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