Home Equity Loans – 4 Most Bugging Questions You Are Afraid To Ask A Banker

By on April 29, 2014

The amount of equity in my home is bursting at the seams. Should I get a home equity loan or even sell the house for retirement?

If you have bought your house a long time ago, the chances are that value has appreciated while the outstanding mortgage has considerably reduced or even fully paid off. Historical data showing the tendency of real estate prices to rise over the long term is no gimmick. In fact, for many retirees or those who are retiring soon, the careful play of home equity is the foundation of their retirement plans. There is no embarrassment at all to loan against a property or just selling it to cash out.

Should the thought of taking on another loan sound daunting to you, give a thought to trading down to a smaller sized house or apartment. When making such a move, you must absolutely make calculations of the amount that you can obtain from a sale, and how much a replacement will cost. Needless to say, if the difference is a small one, it could be pointless to go ahead with it.

Also take into consideration that if you are living in the city, downgrading your home to one in the outskirts can not only net you a tidy sum of profit, it can also mean a lower cost of living in the long run. These are number that can really add up without anyone noticing.

I don’t like feeling as if I’m pick-pocketed. What are the costs and risks involved?

Equity loans are given by financial institutions including banks and associations. Because real estate is one of the most desired form of collateral to a bank, the interest rates of home equity loans tend to be the lowest compared to any other types of loans. The only real prospect of a loan with a lower interest is another mortgage.

The process of setting up such a credit facility is very much similar to how a mortgage for property purchase works. So you can expect to incur expenses relating to appraisal, legal work, administrative work, etc. If your current home loan was for 25 years and the new equity loan that you are taking up will be for 10 years, you can expect you monthly payments to be higher compared to what you are currently on. This is also dependent on the amount owing at the point of disbursement.

The biggest risk as you should already know is that you are putting your house at risk. You do not have to worry about it as long as you continue to make timely payments whenever they are due. But should you start to consistently default on these repayments, the lender will have the right to recall the loan or even foreclose you home to reclaim their money via an auction.

When watching a movie, the obvious choice between chips and raw vegetables is the former. When will a home equity loan be an obvious choice?

Salespeople tend to pull out all the stops in order to sell their products. Sometimes you will come across those that suggest you reap the rewards of equity by cashing in and using those funds for vacations and luxuries. And if you have half a financial brain, you will tacitly know that is a wacky way to manage personal finances.

There are 2 clear situations where a home equity term loan will benefit you and you situation. The first is when you have a number of different debt obligations with high interest rates. In this case, you can consolidate the debts by using refinancing with cash out. Then use the funds to pay off all other debts. You will then end up with only 1 loan to service, at a lower interest. The second is when you have an investment opportunity to generate returns that exceed the costs of the new mortgage. If you can make 2% returns while paying 1% interest on the funds, you don’t even need to use a calculator to see that you can make money out of such an arrangement.

I don’t want to touch my trophy funds. Should I borrow against equity to fund essentials like a basic car, children’s college, medical expenses, etc?

This is a question where the answer depends. The variable it depends on is whether the item the funds are spent on is an investment will repay you financially or psychologically in future. Investing in your kid’s or your own education can open up the doors to more opportunities in future. And using borrowed money to buy a car you do not need is viewed by many as a waste of money.

As different individuals will have their own personal values on how to judge whether an investment in something will have a worthy pay-off in future, it will not be surprising to find that many people will have varying answers to this seemingly innocent question on the surface. A simple useful tip to judge whether an equity loan is a good choice is that as long as you have any doubt about what you are doing, don’t do it. Or educate yourself to the point where you are fully comfortable with your actions before calling up the bank.



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