Fast appreciating home values could also encourage you to refinance for a larger mortgage to pull out equity, say, to consolidate bills, perform home improvements, buy a new car, pay for your child’s education or meet other financial needs.

With interest rates that are typically lower than many credit cards, a home equity loan can be the one of the best ways to finance a large purchase or cover an unexpected expense. But home equity loans and credit lines are more expensive than first mortgages, and may be more expensive than other financing options, such as an auto loan or subsidized student loan.

A no-equity home loan is simply a confusing name for a high loan-to-value (LTV) home-equity loan, in which the amount you’re borrowing surpasses your home’s total value — often by as much as 25%. This creates a sort of a hybrid secured/unsecured loan. Not surprisingly, these risky loans are aimed at the truly cash-strapped. And, sadly, that’s a booming market. Indeed, loan originations for the so-called subprime market have swelled from $25 billion in 1993 to $187 billion today, according to SMR Research. That said, high LTV or no-equity loans still make up less than 10% of all home-equity loan originations.

In a recent report, the FDIC said it wasn’t too concerned about the home-equity boom. One factor behind the uptick, the agency said, has been a rise in homeownership to nearly 69 percent of households, up almost 2 percentage points in five years.

The particular benefit of home equity lines of credit, as opposed to up-front loans, is their flexibility. A credit line like this can be a good way to help pay for a child’s education, for example, because you can borrow—and pay interest on—each year’s costs only as they arise. With an up-front loan, you would pay interest on all the money from the very beginning.

Because this flexibility is the key benefit, try to avoid a home equity line that specifies a certain minimum be borrowed every time you draw on the line or that requires an initial cash advance you do not need. Also, unless you have very strong willpower, don’t take the “credit card” that some lenders may offer with a home equity line. Carrying it around in your wallet may make drawing on the line too easy and encourage you to borrow more freely than you should.

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This entry was posted on Friday, February 10th, 2006 under Home Equity Loans. Responses are currently closed, but you can trackback from your own site.