Home Equity Options

Home Equity Options

Owning a home gives one a sense of pride and accomplishment. It is a fulfillment of a dream where best memories of members of the family will not be forgotten. The home is a cushion when financial distress occurs and thus we resort to our property as an alternative to see us through the economic shortfall. But like waking up from the American dream, we are faced with the danger of foreclosure.

Before deciding on an option to take to avoid foreclosure, it is important to know your home equity. It is the key factor in determining your net worth. Home equity is the difference between the unpaid portion of the mortgage and the fair market value of your property. Many homeowners take advantage of their existing home equity before its rate drops. There are three options available; however, it is wise to have a thorough understanding of each of these options considering that many people failed to distinguish one from the other. An error of fact can lead us to an error of judgment in choosing the best option for our situation.

The Equity repositioning strategy (ER) is a financial strategy of moving your asset which is your home equity into diverse investment activities. The idea is to loan against the equity value of your home and reposition it as a capital asset. This is subject to a fixed interest rate and can only be possible if you have at least 70% of equity in your home. It is ideal for those who have been living in their homes at least for five (5) years and the value of the property is more than the value of the mortgage loan. This involves long term investments spanning a period of fifteen (15) to thirty (30) years. Although it can increase liquidity and income from investments; it involves greater risk because you have to dispose of it when there is a market downturn. This option if properly thought of can be a means with which to pay your mortgage and reinvest in low risk investment activities.

The home equity line of credit (HELOC) is similar to a credit card in that you are given a loan with a maximum ‘cap’ secured by your home. You may use the loan at will similar to a credit card. This is usually resorted to as a shorter-term borrowing to meet certain emergencies. The risk in this option is the fact that the loan is subject to an adjustable interest rate, as such you may saddled with high interests and monthly payments as the value of your home depreciates. The risks under this option are great and it can leave you in a worse position than when you started.

The last option is the home equity loan (HEL) which is the most common. It is a loan that you receive in a lump sum. This is subject to fixed monthly payments and interest. This is usually resorted to when you have a clear idea where the loan will be applied. The risk of taking this option is the fact that guidelines to qualify for the loan are quite tight and if granted it can ‘strap’ your accumulated equity equivalent to the amount of loan and the amount spent as the home depreciates in value. This option like the HELOC can leave you in a worse position in debts.

In all the options always bear in mind that you are pledging your home and would stand to lose it if you default in your payments. In borrowing la loan be meticulous in scouting the market and comparing interest rates. Avoid paying other fees for application or appraisal. You have to ensure that the lender is not taking fees on the loan. Home equity borrowing is considered superior than consumer debt because you can declare the deductions of the interests which means you have to detail and itemize. Moreover, the tax break is only allowed on interests on loan of $100,000 or less and in loans over that amount the interests can no longer be deductible. Finally, know what you are risking. Having a home is better than some expenditure like improvement, etc. are not as important as having your home. Reserve at least 20% of your equity.

By Steven Katz