Borrowing Against Your Home's Equity: What You Need To Know

Consolidating your debt and paying it off with a home equity loan is becoming a popular method of paying off debt. It seems like easy money, but before you jump on the home equity loan bandwagon, know what you’re getting into.

In a home equity loan or line of credit, you borrow against the amount of equity you have. A loan is a fixed amount, while a line of credit is more like a credit card.

These loans seem simple, but one key factor must be remembered - your home is the collateral. If you can’t pay back the loan, you could lose your house. However, there are many other things to think about. Before you take out that loan, consider these points:

Important points to consider about home equity loans:

• We can’t say it enough - if you default on the loan, you could lose your home.
• Some lenders offer high loan-to-value programs, meaning you can borrow up to 125 percent of your home’s value. Sounds tempting, but you could end up owing more than your home is worth.
• If you use the loan to pay off credit card debt, but don’t change your spending habits and run up those cards again, you could end up much deeper in debt than you were before the equity loan.

Consider this - if you use a home equity loan to pay off credit card debt or purchase something, you will actually pay more in interest, over a much longer period of time. Why? Most are 15 to 30 year loans. Say you borrow $10,000 at 6% interest and take 30 years to pay it off. You will have paid nearly $20,000 for that $10,000 loan. Not such a deal, is it?

The bottom line? There are some good reasons to take out a home equity loan. But you must do your homework, know the facts, and be realistic. Your home isn’t a giant credit card - it’s the roof over your head. And after all, that’s not something you want to jeopardize.