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Ask Susan Responses
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Loans: Home Equity Loans |
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More Ask Susan |
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I just closed on a home. My home is appraised at $137,000. I paid $100,000 for it because the owner is financing it and I have lived here for 12 years. Since I have equity right away, can I apply for a home equity loan to make some improvements on the property and to pay off my debt? My credit at this time is very poor, but I make enough money to pay my mortgage. -Sue |
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Sue,
Your first hurdle will be to qualify for the loan. Your ability to get a home equity loan will depend on three primary qualifications: (1) the ability to repay the loan, (2) the credit background to verify your repayment record, and (3) the necessary collateral to guarantee repayment.
Because your credit is self-described as "very poor," you might benefit from waiting until you are more creditworthy. Visit the section on 'credit' for tips on improving your credit score.
The Advice Team |
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My husband makes good money, but is a poor manager. Meanwhile, I'm struggling to stay current and getting nowhere on eliminating my credit card debt. I have sufficient equity in my home to take out a second mortgage and get these cards paid off in about two years. Should I do this? I'm at my wit's end and really need some advice fast. -Pat |
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Dear Pat,
You are the only ones that can determine whether or not an equity loan is the answer to your problems. Because your husband is a “poor manager,” I am inclined to think that it’s not. It is important to remember that you can’t borrow your way out of debt.
A home equity loan can decrease your monthly payments, but it cannot prevent the problems from happening again—only you and your husband can do that. If you take out the loan be sure that you are both willing to make a lifestyle change and commit to using credit wisely. If you do not do this, you may end up twice as in debt as when you started. Also, you must be sure you are able to make your home equity loan payments on time and as agreed. You are not just risking your credit report; you’re risking your home.
The Advice Team |
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With interest rates relatively low, is it a good idea to take out a home equity loan to consolidate high interest credit cards? Our income does not allow us to pay much more that the minimum monthly credit card payment. -Karen
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Karen,
Home equity loans can be attractive because it is much easier to make one payment instead of writing checks to all of your creditors every month. For some types of equity loans, interest paid may also be tax deductible. As you know, a home equity loan might also reduce your monthly payments.
However, a lower monthly payment does not mean lower cost. To understand the true cost of credit, figure out what you will be paying over the life of the loan, rather than just looking at the monthly payment. Be sure to factor in any closing costs. You will also want to consider such things as the length of time you plan to be in your home and the marketability of you home if you had to sell.
Good luck with your decision,
The Advice Team |
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