12 September 2007
Foreclosure doesn't just happen to people who don't make their mortgage payments. Your homeowner's association (HOA) can take your house or condo if you're not careful. In one case, a disabled California man lost his home in a foreclosure sale because he was $123 behind on his homeowner's dues. The house was worth $280,000. Unfair? Abusive? You bet!Read More »
Mortgage Methods: A Simple Rule of Thumb for Home Equity
By Richard BarringtonNFNS Columnist
Home equity loans
have been painted unfairly as a major culprit in the recent mortgage crisis.
Such a broad category of loan is neither good nor bad in its own right; it's
the way homeowners use home equity that determines whether the loan makes sense
or not. Using a simple rule of thumb, homeowners can increase their chances of
using home equity to their best advantage.
Using Home Equity to
Your Best Advantage
The rule of thumb is this: use home equity when it is the best way of financing a purchase you
could otherwise afford, and not when it is the only way of paying for something you otherwise couldn't afford.
Here's what that means. You have a purchase you want to make. Think of three ways of paying for it:
- You could save up for it, if your monthly budget has enough slack for you to put aside an extra amount regularly.
- You could take out a consumer loan, if your credit rating is good enough.
- You
could finance it with a home equity loan.
If the first and second paths of financing aren't
possible--if you don't have that kind of slack in your monthly budget, and/or
your credit rating is not that good, you should seriously consider foregoing
the purchase. Even if the third option, a home equity loan, is open to you, not
being able to do either of the first two options suggests you may run into
repayment problems.
The Refinance
Alternative
One final thought. If you meet the above test for a home
equity loan, first consider whether it would make more sense to refinance your
existing mortgage. If interest rates have fallen, a refinance will save you
some money to help offset your new purchase. Even if interest rates are about
the same as for your original mortgage, you might find refinance rates for a
full mortgage are less than those for a new home equity loan.
About the Author:
Richard Barrington is
a freelance writer and novelist who previously spent over twenty years as an
investment industry executive.
About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.