5 Tips for Your Home Equity Loan

5 Tips for Your Home Equity Loan

Bankers love it when you borrow against your house. That's reason enough to be wary of home-equity lending.
Yet millions of Americans are buying lenders' pitches that our homes are a good source of funds for whatever our little hearts desire, from Super Bowl tickets to exotic vacations to investments in stocks and bonds. That lust for cheap cash has turned home-equity lending into the fastest-growing, and very profitable, area of consumer loans.
Mainstream home-equity lending soared 33% last year according to SM R Research, with new borrowing at nearly quadruple the level of just five years ago. The amount we owe on home-equity loans and lines of credit, $719 billions, now exceeds the balances on our Visas Card, Master Cards and other general-purpose credit cards.

Good for banks, risky for consumers

The risk to lenders from all this debt is quite low. The amount banks actually lose on home-equity lending overall is about 0.15%, Yacht said, compared to more than 3% on credit cards."There's no bad debt to speak of," Yacik said. "(The borrower's) home is at stake, and they have to be deeply extended not to pay their bill." 

When to use these loans

A home-equity loan is generally the best choice when you know exactly how much your purchase is likely to cost and you need several years to pay it off. A major home-improvement project, for example, might be a good candidate for a home-equity loan.A line of credit may be a better option for shorter-term borrowing, or when you want to be able to tap your home equity to cover emergencies.
Rising home prices mean that banks can get their money back even if they have to foreclose, and troubled borrowers typically sell the home or refinance before that happens.
The low default rate masks the real problem with home-equity lending: Most borrowers are using the loans and lines of credit to fritter away their long-term wealth on short-term spending.
"I recall one computers magazine a couple of years ago that recommended that people get home-equity loans or lines of credit to purchase computers," said Andrew Ana lore, editor of Inside B&C Lending, an Inside Mortgage Finance publication. Then there was the recent Associated Press article about fans calling mortgage lenders to finance Super Bowl tickets, on top of the more usual borrowing to fund big-screen TVs to watch the game.
"That kind of stuff can be problematic," Ana lore said, "because people sometimes don't understand that their house is on the line if, for some reason, they are unable to pay for their new computer or big-screen television."

Understand loan types

Solid statistics are hard to find, but lenders believe a third or less of home-equity borrowing is used for anything that could be considered an investment, such as home improvements or education. The rest goes for debt consolidation, vacations or purchases of assets that quickly depreciate, such as cars.If you're thinking of literally betting your house with a home-equity loan or line of credit, you should clearly understand how these loans work, when to use them and how to get the best deals.
First, the basics. There are two types of home equity lending, loans and lines of credit:
Home-equity loans are installment loans, like regular mortgages and auto loans. You're given a certain amount of money which you typically receive all at once and pay back according to a set schedule, over time. Home-equity loans usually come with fixed rates and fixed payments.
Home-equity lines of credit, by contrast, work more like credit cards. You're given a credit limit that you can borrow against, and paying down your debt frees up more credit that you can potentially spend. Home-equity lines of credit have variable interest rates that are typically tied to the prime rate.