how does a home equity loan work. What are the pros/cons?

I am having a slow time at work, and was wondering what can I do to get the bills taken care of for the meanwhile while things are down (damn commission sales have never been lower). I was wondering about home equity. How does it work? What's all involved. Anyone care to help me out?

Home equity is generaly a bad idea unless you plan on using the money to gain wealth.

Examples:

1. Fix/Upgrade your house thus rasing it's value.
2. Buying/Starting a buisness.

Otherwise, your just asking to make things worse. Especialy with the new Bush Bankruptcy laws.

-I don't know much about Home EQ loans.. But that's my take on them...

A Home Equity Loan allows a homeowner to borrow money by leveraging their equity, or the amount of money they have invested into owning their home.


Basically you are borrowing against yourself. Like Norton said, if you were using this money to increase the value of your home or to fund a business startup, it might be a good idea.




But, this only really pays off if you have owned your home for many years. If I am not mistaken I think you bought your home with in the last couple years. If so, a home equity loan probably won't do you any good.

Also, you may want to check out these stories on them:

http://moneycentral.msn.com/content/Banking/Homefinancing/P106701.asp

http://moneycentral.msn.com/content/Banking/Homefinancing/P107768.asp


Might help make more sense of this.

you're making an exchange of promises - the lender promises to pay you a certain amount of money, and in exchange, you promise to pay it back, plus interest, and in that period of time that you owe them money they get a lien of title on your property. If you default on the repayment of the loan, the lend has to go through the local statutory rules for exercising the lien on your property and must resell it at the best price possible (as opposed to just selling it for what they need to one of their relatives, thereby giving you back nothing). If they sell your home, in the case of a default, you'll get back the leftover money from the sale, which is the price sold at minus unpaid principal on loan and administrative charges.

Basically, it's not a good thing to consider if your name is Spike Speigel and you have had a history of shitty luck (truck vandalised, job termination, etc).

Get a second job. It'll give you less headaches than taking out a loan against your home.

How much Equity do you have in your house? What you can do is something I just did was a Cash out loan. My house value went up here in AZ and I was able to take out cash and refinance my loan.

wasabi said:

Basically, it's not a good thing to consider if your name is Spike Speigel and you have had a history of shitty luck (truck vandalised, job termination, HAVING SEX WITH CRAZY WOMEN, etc).

Click to expand...

Fixed.

Depending on your situations, a Home Equity Loan OR Home Equity Line of Credit could be good or bad.

If you are fixing up your place, or paying off high interest credit card debt (or some other high interest loan) it could be good because:

The interest rate on the HELOC should be much lower than credit card interest rates, assuming you have good credit, and equity to draw from. With the new laws, you are screwed either way if you go into bankrupctcy, whereas, in the past, credit card debt was 'unsecured debt' so the CC issuer was screwed if you filed bankruptcy.

Interest on a HELOC, in most cases, is tax deductable, giving you a little bit more cash in your pocket, and some more security in paying it back.

HELOC's are bad if:

They are variable rate without any terms either fixing the rate or capping adjustments.

If they give you a credit card to tap the line of credit, because people are not responsible.

Basically, if you are going to do anything with home equity, make a plan, and think it through many times. For many American, their wealth is in the home they own, that is something you do not want to mess with unless you have a solid plan.

www.bankrate.com is a good site for some research, lots of info.

Mouse_Master said:

Depending on your situations, a Home Equity Loan OR Home Equity Line of Credit could be good or bad.

If you are fixing up your place, or paying off high interest credit card debt (or some other high interest loan) it could be good because:

The interest rate on the HELOC should be much lower than credit card interest rates, assuming you have good credit, and equity to draw from. With the new laws, you are screwed either way if you go into bankrupctcy, whereas, in the past, credit card debt was 'unsecured debt' so the CC issuer was screwed if you filed bankruptcy.

Interest on a HELOC, in most cases, is tax deductable, giving you a little bit more cash in your pocket, and some more security in paying it back.

HELOC's are bad if:

They are variable rate without any terms either fixing the rate or capping adjustments.

If they give you a credit card to tap the line of credit, because people are not responsible.

Basically, if you are going to do anything with home equity, make a plan, and think it through many times. For many American, their wealth is in the home they own, that is something you do not want to mess with unless you have a solid plan.

www.bankrate.com is a good site for some research, lots of info.

Click to expand...

If he has some equity in the place, I would suggest a cash out loan. That way you end up having one payment instead of two. Another thing is to convert your loan to an interest only loan. Assuming you only plan to live at your house a few years, I would do a 5 year ARM and bring you payment down while receiving cash for your house.

Highlander67 said:

If he has some equity in the place, I would suggest a cash out loan. That way you end up having one payment instead of two. Another thing is to convert your loan to an interest only loan. Assuming you only plan to live at your house a few years, I would do a 5 year ARM and bring you payment down while receiving cash for your house.

Click to expand...

I don't know if I would even want to go with an ARM anymore, especially since the 30 year fixed rate today in DC was around 5.25%, and 5/1 ARM was 4.75%, just not enough reason to take it. But, I am looking at the long term, what interest rates will do. The ARM will give you a good rate now, but if you do not move, you will be screwed at adjustment, at least you should be according to history.

Besides, what you are suggesting would involve closing costs, I believe, but maybe someone like DiTech would do it cheap.

Interest Only loans are another loan that should be taken with caution. If the real estate bubble bursts (at least in DC) and house prices drop, you could be stuck owing the bank money when you sell your house, because the equity the property had might be lost, and you have not been paying principle. And some lenders are playing dirty games with negative amortization.

Many people have been taking out $600k to $700k interest only loans, 100% financed here in the DC area, and I cringe at that. The houses that are being built for that price would cost about $250k elsewhere. Hell, the $400k house I am building about 50 miles SE of the city costs $750k from the same developer about 25 miles from the city, and it is on less land.

If you think it's a temporary thing, I'd go with a Home Equity Line of Credit (HELOC)

eventhough it's variable, you can find banks that give you a 90 day window of 1 percent or less. You can take out as much as you need and pay it off fast. Most banks want you to keep it at least for 2 years. Some will have no closing costs and no fee for the first year, but expect anywhere from 300 hundred dollars per year afterward (all banks have different practices, do a lot of asking, don't let the pretty personal banker talk you into something you don't want).

If anticipate that your problems are going to take longer, than a HELOAN might be a good idea. Biggest drawback is a fixed rate (could be a plus if the rates go up) and you'd have a fixed payment. Generally this isn't what I'd call a "good" short-term fix.

But if you lose it with the HELOC and end up getting tied into it, you'll could end up paying up the ass if rates go up.