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Need a Home Equity Loan? 5 Things to Consider

Posted by  on Mar 30, 2010
 

The Federal trade Commission (FTC) recommends reviewing your financial needs and researching home equity loan options. These considerations can help you find your best home equity loan.

  • Understand the relationship between market trends and home equity: Home equity is the difference between your home's current value and the amount owed on mortgages. Mortgage lenders use a term, loan-to-value, or LTV, when determining eligibility for home equity loans. You can estimate LTV by dividing your primary mortgage balance by your home's current value.
  • Know how changing property values can impact your home equity: Studying local real estate trends can help you understand the risks associated with home equity financing. If property values decline after you take out a home equity loan, you'll have less home equity and could owe more on mortgages than your home is worth.
  • Increasing your debt for the right reasons: Today's conservative credit environment coupled with uncertain real estate markets may limit home equity loan options. A home equity loan can help with debt consolidation or making home improvements. Using home equity loans for frivolous purchases can jeopardize your financial security, as defaulting on home equity loans can cause foreclosure.
  • Home equity loans cost less than refinancing: A mortgage refinance costs more than a home equity loan or line of credit. Although home equity rates are typically higher than current mortgage rates, you'll save on costs compared to refinancing.
  • Evaluate the "big picture:" Home value, home equity, your credit scores, and your overall financial situation contribute to your decision to use home equity financing.

Discussing your options with a financial advisor can help with identifying pros and cons according to individual circumstances.

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