Over the past few years many Americans have established lines of credit secured by the equity in their homes. This has allowed them to expand their purchasing power while all too often not saving even one dime. For marginal borrowers this can turn out to be highly risky as it exposes these families to the loss of their homes. Lenders tend to quickly change from best friend to worst foe in times of financial crisis and need and will "take it away if you can't pay".
Prior to mortgaging or refinancing a home one should consider what the families finances would look like if one or more of the family members living in the home lost their job or became seriously ill. One should also consider the effects that a declining housing market might have on your financial situation. Yes, I know that housing prices world wide have been super strong over the past several years. That is just the point. The end of the super cycle may be near. Housing prices have benefited greatly from the excessive liquidity provided by the US Federal Reserve but that liquidity fountain can and will dry up one day. Inflation is becoming more of a concern so perhaps the well will run dry soon. Beware.
How long could you keep your home payments current if there was a sudden unfortunate loss of family income or if your adjustable rate mortgage quickly rose by 50% or more?
Even with the risk of refinancing or taking out a home equity loan there are times when it may in fact be wise. Perhaps credit card debt has gotten out of hand. You can get a home equity loan at much lower rates, pay off the credit card debt, and lower your monthly payments, perhaps as much as by 40-50%.
A word of warning, however. You must not run up your credit card balances once again or you will end up in even worse financial shape than you were to begin with. It would be far safer to avoid temptation by cutting up your credit cards and using a debit card instead.
There are other occassions when a home equity loan may be justified. Perhaps you wish to start your own business and are willing and able to take the risk that things may not work out as you plan. A home equity loan will likely be the cheapest source of start up capital around.
Perhaps you wish to purchase an existing business, one that should earn you a good income for a long time to come. Again your cheapest source of capital would likely be a home equity loan.
In general, one should consider a home equity loan when the loan proceeds are used to very likely improve ones financial position. This would be a wise use of the loan proceeds.
One should use extreme caution in using a home equity loan to purchase additional consumer goods, say a large expensive flat screen TV set or a new SUV. The worst example of the use of a home equity loan that I know of was a couple who took out a loan in order to go to the Superbowl. Just think of how much that Superbowl trip will really cost over the years as interest payments are added in. What an awful short sighted financial decision.
My advice. Use a home equity loan only to improve your financial position or to raise funds in a true emergency situation. Using a home equity loan to purchase things that will only lose value is a misuse of the loan proceeds that could cost you what is probably your most useful and valuable possession ... your home. About the Author
David is a full time Internet business developer who maintains an office in Bradenton, Fl. but who spends most of his time in the Land of Smiles, the Kingdom of Thailand.
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