What is home equity debt?

By Meiling Hunter
Mortgage Credit Problems Columnist

Before you purchase or refinance a home, you should have a good understanding of what home equity debt is, what risks there are, and if there are any alternatives that will better meet your needs.

First, some definitions.

• Equity- The difference between how much your home is worth and how much you owe on your mortgage(s).
• Home equity loan- One-time lump sum loan that is paid off over a set amount of time with a fixed interest rate and equal monthly payments.
• Home equity line of credit (HELOC)- A revolving home equity loan that can be used and repaid repeatedly. The payment is calculated from a variable interest rate and the account balance, similar to that of a credit card.
• Home equity debt- Debt secured by your home. This includes all types of mortgages including home equity loans.
  

Next, some thoughts on home equity.

If you are a homeowner, there are three ways you can tap into your home equity: sell your home and buy a cheaper one; refinance your current mortgage and take out more than you currently owe; or take out a home equity loan.

While there are plenty of valid reasons to tap into your home equity -- college tuition, debt consolidation, home improvements, or for emergencies -- you need to be conscious of the risk you are taking. By opting for a home equity loan, you are securing your loan against your home and if you default on your loan you may lose your home.

Last, consider some alternatives.

Debt of any kind should never be an impulse decision. Ask yourself the following questions to see if there is an alternative that will better meet your needs:

• Can I sell some things I don't need? Look around your home and garage-- are there items that you don't need? Selling unused items like boats or video game consoles can free up cash very quickly. 
• What are my options in terms of borrowing against my 401K? Consult your HR person to discuss your options.
• Can I tighten my belt in order to free up some cash? For example, downgrade your cable package, take public transportation to work to save on gas, cut down on eating out, and/or make coffee at home in lieu of the $4 latte habit.
  

As long as you are aware of what home equity debt is and what your risks are, tapping into it is not a bad thing. What is a bad thing is blindly taking the easiest home equity loan option without weighing your options. Be an informed consumer, ask lots of questions, and don't be afraid to walk away if you are uncomfortable with the terms and conditions of the home equity loan being offered.

About the Author
Meiling Hunter has worked in the mortgage industry for four years. She graduated from the University of California, Davis, with a double major in Economics and Philosophy.

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