Ignite FB Tracking PixelHome Equity Loans and Lines of Credit: When Should You Use Them? - Jeff Rochford
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Home Equity Loans and Lines of Credit: When Should You Use Them?

by Jeff Rochford 01/06/2019

No homeowner wants to borrow more money. However, if you’re experiencing hard financial times or looking for a way to fund a home improvement project, there are ways to borrow money with your home as collateral.

In this article, we’re going to talk about home equity loans and home equity lines of credit (HELOC). We’ll explain how they differ and break down their benefits and risks.

Before the bubble

Before the financial crisis of 2007-2008, many homeowners were borrowing readily based on the equity of their home. Interest rates were low on home equity loans, encouraging homeowners to leverage their portion of homeownership.

During the recession, however, all of that changed. People owed more money on their mortgages than their homes were worth, and banks became reluctant to lend.

In recent, years, however, house prices have been creeping back up, and banks and homeowners alike have gained confidence in the equity of their home.

As a result, a growing number of homeowners are turning back to home equity loans and lines of credit as a source of low-interest financing.

So, what exactly are these loans and credit lines?

The difference between a home equity loan and a line of credit

A home equity loan is a lump sum of money that you borrow which is secured by the value of your home. Typically, home equity loans are borrowed at a fixed rate. Lenders take into consideration the amount of equity you have in your home, your credit history, and your verifiable income.

A home equity line of credit (HELOC) is a bit different. Like a credit card, you are able to borrow money as you need it via a credit card or checks. HELOCs often have variable interest rates, which means even if you’re approved for an initial low rate it could be increased. As a result, HELOCs are better suited for borrowers who can withstand a higher leverage of risk and variation each month.

Is now a good time to borrow?

If you’re a homeowner, there’s an understandable temptation to use the equity you’ve built over the years to your advantage. In some cases, home equity loans and HELOCs can earn you better interest rates than other forms of borrowing.

However, as with other loan types, it’s important for homeowners to realize that HELOCs and home equity loans are not the same as having cash in your savings account.

Another danger that borrowers face is the potential for foreclosure if things go badly. While most lenders won’t seek foreclosure after a few missed payments, your home has been put up as collateral for repaying the loan. Most lenders will choose to sell a defaulted loan to a collections company rather than seek foreclosure.

Ultimately, the best course of action is to avoid borrowing unless it will help you out financially in the long term. However, for those with high home equity who may, for one reason or another, need to borrow, a home equity loan or line of credit might be the best choice.

About the Author

Author
Jeff Rochford
I am a native Phoenician and with my experience in real estate as well as my intimate knowledge of the local area, I work extensively to help buyers and sellers meet their real estate goals. For buyers, as a Phoenix area native, I have extensive knowledge of the metro Phoenix area from Scottsdale/Carefree in the northeast to Glendale/Peoria in the northwest to Queen Creek in the southeast to Goodyear in the southwest. I will search until I find the property that best fits your lifestyle. I will then help negotiate the best possible deal. I also have extensive experience with buyers who wish to purchase new homes. If you are interested in buying a new home you have the right to be represented by your own agent so don’t miss this opportunity speak to me before visiting the builder’s models. And best of all there is no additional cost to you. For those who have a home to sell, I will work with you to design a marketing plan that works best in this dynamic market. In addition to the traditional ways of marketing your home, I can expose your home on the internet to thousands of buyers. These are buyers from all across the country and around the world that can contact me looking to buy in the Phoenix area. Nothing gives me more joy than helping my clients find and buy that perfect home. I would like to be Your Realtor. If you are looking to buy or sell a home or would just like more information, please call me at (602) 369-7882 or just email me at [email protected] Thanks again for choosing MyPlaceInTheDesert.com ‘For Your Place In The Desert’ for Phoenix real estate.