The Home equity Loan or HELOC has been around for many years and in the past has been a useful tool in helping middle class families do improvements on their home, send a child to college or even help provide starter capital for a small business. The concept is based on the idea that your home is worth a set amount in the current market, for example $250,000. Your mortgage balance is a portion of that market value, for example $ 100,000 leaving you with $ 150,000 in equity.




Home Equity Loans - Are They the Best Way to Borrow Money?

The Home equity Loan or HELOC has been around for many years and in the past has been a useful tool in helping middle class families do improvements on their home, send a child to college or even help provide starter capital for a small business.

The concept is based on the idea that your home is worth a set amount in the current market, for example $250,000. Your mortgage balance is a portion of that market value, for example $ 100,000 leaving you with $ 150,000 in equity. This equity can be accessed via a loan or line of credit up to a certain percentage of that equity amount. Any debt against that equity lowers the value of the equity above total debt (mortgage and Home equity). So a $50,000 loan against the equity would lower the available equity for future loans to $100,000. Or a line of credit (more common use of HELOCs) where $20,000 was actually used would lower available equity to $130,000.

Home equity loan repayments are tax deductible to the consumer and in a stable economy where interest rates are low a family with substantial enough income to make the payments or pay off large chunks of the loan can do well.

Unfortunately, the current atmosphere for these loans is bleak. People borrowed on the equity of their homes for any number of wise or unwise reasons and saw the value of their homes shrink along with any available equity. Some saw the reduction so severe that the loans outstanding were more than the worth of the house.

It is also unfortunate increase of unscrupulous lenders and their agents and brokers who misled people into loans they could not allow, such as mortgage brokers, who failed to tell their client about escrow taxes (and property owners insurance houses), which would be payable on top of their regular mortgage payment, thus doubling prepay promised to a little less accessible.

Or the bank who gave kickbacks to appraisers to over-appraise a home so that more equity would be available; equity often borrowed on at the closing. More business for the lender, bad for the borrower.

When looking at a home equity loan try to find a reliable lender through research, ratings and word of mouth. Next, look at rates. Some are set at the Prime Interest rate or slightly above. They vary from lender to lender as well as do the closing costs. Next, determine the length of time on the loan. Remember the loan will be structured to indicate the amount of your payments representing interest only. If you pay via that method you will be paying interest but not decrease your principal.

Most importantly, do an honest self appraisal of why you wish to use the equity in your home.
Many people use HE loans to pay back high interest credit card debt. What happens all too often is that the credit card is not destroyed as it should be, but used again later. Credit card debt thus increases and the HE loan still hasn't been paid off and so total debt has increased.

Going into debt can be useful if well planned and thought out but many times the lender is plunged into a cold, murky place where no matter what...the loan has to be paid back.

Alan S. Fernandez is president of Foundation Financial Services with a BBA in Finance and Economics from Iona College, studied under the Life Underwriters Training Council and Certified Financial Planner programs and with 15 years in the insurance industry is a well known problem solver among businesses and individuals alike. He is also an insurance instructor with Citicorp. He can be contacted at afern109@optonline.net or visit the FFS website at http://www.foundationfinancialservicesny.com

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