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Home equity loans: Avoid borrowing for the wrong reasons

Home equity loans and lines of credit are mortgages; this means that they allow lenders to foreclose if you fail to repay or otherwise default on the loan. Here are four popular reasons for borrowing against home equity, and why they aren't good enough to put your home at risk.

  • Highly specialized home improvements: You want to run electric trains throughout your home, or think your dogs need their own rec room complete with an indoor swimming pool. Before borrowing for such projects, it's wise to consider which home improvements can add value to your home. Local real estate pros can help with determining which projects bring the best return for your investment.
  • Debt consolidation for moderate amounts of debt: Adding to mortgage debt for smaller debt balances may cost more than it's worth. Most home equity loans include lender fees that can negate or reduce potential savings. Alternatives include personal debt consolidation loans offered online and by your bank or credit union.
  • Education expenses: Instead of further mortgaging your home, check into federal student loans and PLUS loans for parents of college students. Federal student loans offer rates comparable with mortgage rates and don't encumber your home's title.
  • Stuff you don't need: Sure, a ginormous flat screen in every room would be great, and so would new granite countertops and a sports car. Before borrowing against home equity in today's uncertain economy, ask yourself if your plans involve needs or wants. Adding a mortgage for non-essentials can increase foreclosure risk and add to other financial problems if your circumstances or home value change.

Home equity loans: Mortgage calculators assist with making decisions

Online mortgage calculators can assist with estimating affordability and comparing mortgages and home equity loan options. Using a mortgage comparison calculator provides side-by-side comparisons of loans you're considering, while using a refinance calculator can help determine whether refinancing your existing mortgage is an option.

Mortgage calculation tools provide general estimates based on information entered. Individual results can vary depending on specific circumstances affecting loan costs, mortgage rates, and closing costs (if any).

 



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