How To Use A HELOC As Your Safety Net In This Tough Economy

[Feb 2, 2009.]

 

It used to be that during tough times homeowners could comfortably rely on their home's equity as a safety cushion. But as home values have depreciated significantly and banks continue to tighten loan standards, this current economy has proven much more difficult to deal with. Fortunately, many homeowners can still find refuge in home equity loans and home equity lines of credit. But while this safety net still exists, here are a few things each homeowner should now consider before turning to a HELOC for help.

Evaluate All Your Options
Before deciding to borrow money through a HELOC, homeowners should first consider all their options and possible alternatives. Depending on the exact need, a HELOC can provide adequate funds to temporarily help out with living expenses, credit card debt, car loans, and medical bills. But while a home equity loan can alleviate some of the burden, it's important to remember that such an alternative may only be a temporary solution. As an example, a temporary slowdown in one's income could warrant the need for a HELOC, while an outright job loss would make it difficult to pay back the loan in the near future.

If you've decided to move forward with a HELOC, first make sure you can afford an additional home equity loan by comparing possible monthly payments and your new loan to value ratios.  Shop around with different lenders and evaluate a few offers to get the best deal on your interest rate and margin. Although pressures may rise during times of need, it's important to not lose sight of these key fundamental mortgage basics.

Get Qualified ASAP
As mortgage lending standards have become quite volatile, it's important to get qualified as soon as you can. Gather your income documentation, asset statements, banking paperwork, and other financial documents as soon as possible. In addition, some homeowners need to consider the strong possibility that they may not even meet lender qualifications when they need the money most.  Getting qualified and shopping around early means faster processing times and more time to reconsider possible solutions.

Avoid Getting Tangled In Your Own "Safety Net"
Using a HELOC as a temporary loan can hold you off during times of need, but it can also be just as dangerous as it is helpful. Making sure you can afford the monthly payments and finding the best loan terms should help you avoid this trap, but there are also a few temptations homeowners should be aware of. Once you have a HELOC, it is crucial that you don't get lured back into debt by borrowing more many than you need. Furthermore, HELOCs are typically adjustable rate loans and become more volatile as you venture out of the temporary fixed rate period. The best move homeowners can make to avoid this unfortunate situation is to consult the help of a qualified mortgage professional and discuss all possible solutions or alternatives.

 

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.