The origination of home equity loans and lines of credit have increased over 20 percent in 2015 over the previous year. As home values continue to rise, and mortgage rates are still very low, more homeowners are tapping the value of their property for extra cash to spend.But a lot of people have no memory of what happened just about a decade ago when homeowners were using their homes as an ATM machine very often to fund a lifestyle they could not really afford. The same people came to regret those decisions when real estate values plunged following the housing bubble burst and a chain reaction of events that affected the job market to the point that people were either unable to afford their mortgage payments or simply gave up on their home seeing drastic value adjustments and ended up losing their homes to foreclosure.Home equity is the current market value of your home minus the outstanding balance of all mortgages. If you know that your property has sufficient intrinsic value built-in, supported by comparable properties sold in your area, and you are considering taking a home equity loan or a HELOC (home equity line of credit), you must be sure you make this decision for the right reasons and approach this as a savvy investor would.For starters, if you don't keep up to date with your home value, you may want to assess whether your property has enough equity before taking the next step and contacting your local bank or mortgage broker to shop for rates. If your property is located in or around the Metro Boston area that we cover, I'll be glad to provide you with a complimentary market analysis that will give you a very concrete idea of value, based on the recent sales of comparable properties in your neighborhood.If we should find that your equity level is sufficient to move forward, then these will be the next steps to take:Choose the type of loanThere are two types of loan you can obtain:A home equity loan lets you borrow a lump sum at a fixed rate and pay it back over a fixed term, the same way a mortgage repayment works. This type of loan makes sense if you need a large amount of money at once.A home equity line of credit or HELOC makes a certain dollar amount available for you to use for a set term which could be five or ten years. Its rate adjusts according to market conditions, and you can tap into it as needed, exactly the same way you would use a credit card. The repayment period can be up to twenty years. This type of loan works best for borrowers who need small amounts over a long period of time.A HELOC typically offers lower interest rates compared to a home equity line of credit and many borrowers are attracted by it and like the flexibility to use it on an as-needed basis, however you must keep in mind that interest rates are bound to eventually rise, which means that a HELOC could cost you more than a home equity loan with a higher fixed rate after all.Many borrowers interested in a HELOC often look for a safety net. They seek security in the event they should experience a time of need in the future. WRONG! If this is a reason for you to consider a HELOC, you must know now that you are up for a rude awakening. In fact, lenders can reduce of freeze your home equity line of credit if your property value drops or if they become aware of a change in your personal financial circumstances.As it stands, both types of loan are full-doc, which means that in order to obtain either one, you will be required to submit your full financial documentation so that the lender may review and verify your income and assets. As with most loans, a higher credit score means better rates so you will be in good shape if your mid-score is in the 700's.Use your equity wiselyBefore the last financial crisis and recession, homeowners borrowed against their property for various reasons but primarily the wrong ones. I remember advising so many people back in 2005 that recklessly used their equity to finance the purchase of luxury cars, boats, expensive vacations, etc. They thought their equity would constantly increase. The wiser ones reinvested their equity in home remodeling projects, but while a part of these borrowers invested in overdue projects that cured extreme cases of obsolescence, another was only meant to be spent in order to turn average properties into luxurious ones, not necessarily considering the projected value after completion. History should teach us that the savvy way to fund home remodeling projects is through savings, rather than loans, unless again your savings won't allow you to address structural or other safety hazards present in your home in which case home equity loans will sure be useful.Unless you do not plan to hold on to a property for long after it is remodeled, and you have most of your funds tied elsewhere, home equity loans can help you cross that bridge but you must consider the market conditions and work closely with a trusted and experienced realtor so to understand and prioritize what home improvements are needed to get your home sold and better assess your return on investment or ROI to see how you will recuperate your initial investment in home remodeling projects when you sell the property.Another wise move would be to use your equity to consolidate high-interest debt with a lower interest rate of a home equity loan. Getting out of debt faster will save you money, that's certainly so.Finally, if you have way more equity than the value which your existing mortgage has financed or principal owed and you are thinking of using the equity of your existing home as a down payment later down the road for the purchase of either a home to move to while keeping your current residence as an investment or the purchase of an income property, keep in mind that a cash-out refinance of your first mortgage could be even less expensive, since the rates on a first mortgage are lower than home equity loan rates. Compare closing costs and interest rates to find out which option makes more sense.
