Home Equity Loan

With home equity in the doghouse, consumers are turning back to credit cards, cushioning some of the blow to consumer spending. Recent data from Equifax Inc. shows that the growth in the number of new credit cards, as well as balances, is as strong as it has been since 2001, after remaining fairly flat in recent years. But defaults also are creeping up. Retail experts have begun to see consumers curb spending by turning to lower-price stores and goods. That explains the projected softness in "affordable luxury" sales at companies such as Nordstrom Inc. and Coach Inc. "Nordstrom customers are trading down to Macy's, and the Macy's customer is trading down to Target," says Bill Dreher, retail analyst with Deutsche Bank.

Wikipedia says: "A home equity loan (sometimes abbreviated HEL) is a type of loan in which the borrower uses the equity in their home as collateral. These loans are sometimes useful to help finance major home repairs, medical bills or college education. A home equity loan creates a lien against the borrower's house, and reduces actual home equity. Home equity loans are most commonly second position liens (second trust deed), although they can be held in first or, less commonly, third position. Most home equity loans require good to excellent credit history, and reasonable loan-to-value and combined loan-to-value ratios. Home equity loans come in two types, closed end and open end. Both are usually referred to as second mortgages, because they are secured against the value of the property, just like a traditional mortgage. Home equity loans and lines of credit are usually, but not always, for a shorter term than first mortgages. In the United States, it is sometimes possible to deduct home equity loan interest on one's personal income taxes."

The FTC warns: "Do you own your home? If so, it's likely to be your greatest single asset. Unfortunately, if you agree to a loan that's based on the equity you have in your home, you may be putting your most valuable asset at risk. Homeowners-particularly elderly, minority and those with low incomes or poor credit-should be careful when borrowing money based on their home equity. Why? Certain abusive or exploitative lenders target these borrowers, who unwittingly may be putting their home on the line. Abusive lending practices range from equity stripping and loan flipping to hiding loan terms and packing a loan with extra charges. The Federal Trade Commission urges you to be aware of these loan practices to avoid losing your home."

Steve advises a man on Kiplinger: "As a mortgage professional, here is what I would recommend. First is to look at the overall debt structure on his 1st and HELCO mortgages. If he can combine the two mortgages into a better overall monthly payment on a fixed rate providing him with a greater monthly savings, then that would be a good decision. If he does refi, make sure you properly structure the cost so you get the maximum tax benefits. Since he is in his 30's, he has another 30 years for his money in his investment account to grow. By leaving the $59,000 in the account and it's able to earn 8% over 30 years, it would grow to over $600,000. Since the compounded effect of his investment account will provided a greater financial benefit than having the money buried in the home. Realize the rate of return on home equity is ZERO. Mortgage interest is tax deductible, since he is single and probably in a 25% tax bracket, his home will act more like a tax shelter."

The Federal Reserve says:

More and more lenders are offering home equity lines of credit. By using the equity in your home, you may qualify for a sizable amount of credit, available for use when and how you please, at an interest rate that is relatively low. Furthermore, under the tax law--depending on your specific situation--you may be allowed to deduct the interest because the debt is secured by your home.

If you are in the market for credit, a home equity plan may be right for you. Or perhaps another form of credit would be better. Before making a decision, you should weigh carefully the costs of a home equity line against the benefits. Shop for the credit terms that best meet your borrowing needs without posing undue financial risk. And remember, failure to repay the amounts you've borrowed, plus interest, could mean the loss of your home.

What is a home equity line?
What should you look for?
How will you repay your home equity plan?

Lines of credit vs. traditional second mortgage loans
Disclosures from lenders

I recommend these links about the home equity loan:

Home Equity Loan