How To Avoid the Home Equity ATM Syndrome?

[Apr 21, 2009.]

 

Home equity loans have been around for quite some time, but many homeowners have fallen into the trap of treating their home like an ATM machine. In the past few years, homeowners across the nation have faced serious troubles of foreclosure and negative equity because of these poor financial moves. Here are a few things that every homeowner can keep in mind to avoid making these same mistakes.

1) Stop Borrowing More Than You Can "Afford"
This point can't be stressed enough because so many problems can be avoided if individuals simply take this precaution. First of all, homeowners should realize that mortgage lenders go through risk based calculations to form the basic qualifying guideline standards.  While shopping around for different home equity loan options a smart move, jumping from lender to lender to avoid certain requirements isn't the greatest idea.

Secondly, homeowners who meet these standard qualifications should continue to investigate further. A mortgage lender does its best to analyze you as a borrower based on paperwork, financial documents, and credit histories. You on the other hand, have the best seat in the house. As an example, with unemployment rates so high, individuals should carefully analyze their future income and long term job stability. Mortgage lenders try their best to analyze the whole picture, but it's a homeowner's ultimate responsibility to make sure a home equity loan is the right move.

2) Stop Borrowing More Because It's Cheap
For quite some time now, mortgage interest rates have begun to rally in favor of homeowners. Unfortunately, many individuals take this as a sign to recklessly borrow more from their home's equity. The rationalization is that cheap loans are a bargain that should be taken advantage of. As a reminder, homeowners should keep in mind the consequences of those who were attracted to the quick loans and cheap loans of only a few years ago. Additionally, most home equity lines of credit carry adjustable rates which means interest rates could increase in the future.

3) Stop Ignoring The Bigger Problem
One of the most dangerous moves is when a homeowner continually taps into their home equity to "consolidate" their debts. While this form of debt consolidation can save thousands of dollars in interest, it can also tempt borrowers into sidestepping their debts. In the most severe cases, the consolidation of such debt leads to a tremendous increase in debt against the homeowner's actual property. While common debts such as credit cards carry interest rates in double digits, home equity loan debts can jeopardize one's property as collateral.

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.