In essence, a home equity loan uses the current equity you have in your home as collateral for a second mortgage. The more equity you have, the more you can borrow. As with all finance provided against security such as property, if you do not maintain your payments, you run the risk of foreclosure on your home. This fact comes as sobering news for many, so you must consider your ability to repay the loan before you borrow against the equity in your home.

Also ask for your credit score. Credit scoring is a system creditors use to help determine whether to give you credit. Information about you and your credit experiences – like your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts — is collected from your credit application and your credit report. Creditors compare this information to the credit performance of consumers with similar profiles. A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt.

When borrowing against a home, a homeowner is securing the loan with collateral—their house. If one can’t repay, the lender has the right to force foreclosure to receive repayment. That means the loss of the home and a foreclosure on the credit report. If a homeowner doesn’t think he or she may be able to make the payments when faced with a drop in income, then a home equity loan probably isn’t the right idea at this time. Additionally, if a homeowner is consolidating credit card debt, then it’s important to keep credit card spending under control.

Selling your home may also pose a problem. Say you get transferred, and you’ve got $175,000 worth of mortgage and home-equity debt, but you can only sell your house for $145,000. You’ve got to come up with $30,000, pronto. If you can’t come up with the cash when you sell your home, your loan is effectively in default. And at that point you’re probably looking at bankruptcy.

Evaluate the tax benefits carefully. Mortgage interest is deductible on first and second homes, including condos, mobile homes and even boats with sleeping, cooking and toilet facilities. Yet most Americans don’t itemize and thus can’t use the deduction. For others, write-offs are limited above certain income levels. See IRS Publication 936 for details.

There are two basic types of home equity loans: lump sum loans which work like second mortgages, or home equity credit lines, which work more like credit cards.

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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.