Three Reasons Why You Should Be Careful With Your Home Equity Loan In This Economy

[Mar 16, 2009.]

 

1. Your Home's Equity Could Drop in Value
In this current economy, declining home values have been the major concern for homeowners around the nation. As foreclosures and mortgage defaults continue to rise, many homeowners are losing thousands in their home equity because of these nearby losses. As a result, borrowers should carefully consider the usage of their home's equity in light of the current situation. One thing to keep in mind is that the money borrowed from your home's equity isn't actual money in the bank--it's money attached to the value of your home. Unfortunately, if you tap into your home's equity and your home drops in value, you run the serious risk of getting trapped with negative equity. So before taking out money with your home equity loan, don't just ask yourself if you can afford the monthly mortgage payments--ask if your home itself can afford this equity loan.

2. Home Equity Loan Interest Rates Could Change
Depending on the type of home equity loan you have, the interest rate may not be fixed for the entire life of the loan. In particular, home equity lines of credit are quite popular mortgages that typically carry an adjustable rate. So while you may be tapping into your home's equity expecting to pay a certain percentage of interest, be sure to ask yourself if you can afford any volatility in the interest rate. If the current interest rate is already pushing your monthly mortgage payments to the limit, it may be best to rethink your equity usage in case of a possible rate increase.

3. You May Not Be As Qualified as You Once Were
Unemployment rates and job instability are among other concerns in this economy which can affect your home equity decisions. One possibility homeowners need to consider is that they may not be as financially qualified as they once were. As jobs are being cut and incomes are reduced, some homeowners may need to acknowledge the fact that they aren't as qualified as when they first applied for their home equity loan. While mortgage lenders are pretty strict to adhere to initial loan qualifications, they are less likely to check these qualifications once the mortgage is issued. As a homeowner, it is your responsibility to decide if you can still afford your mortgage. If you suffered a recent income reduction, a job loss, or expect a future job loss, taking funds from your home equity loan based on previous qualifications is a serious risk. Additionally, if your income remained stable but you have more debts and monthly bills than before, the same caution applies in this instance as well.

The current economy and housing market is definitely a tough combination for homeowners around the nation, so it's important to follow these precautions to avoid any unnecessary headaches. In these situations, homeowners should also consult the advice of a local mortgage professional for more detailed information.

 

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.