Home Equity Loans: When is it Right for You?

By Barbara Marquand
Mortgage Credit Problems Columnist

With the steep decline in home values and tightened credit, home equity loans are tougher to come by these days, but they still are available to those with equity to tap and the credit score to make it a realistic consideration.

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If you're thinking about a second mortgage for bad credit, your contemplation should go beyond whether you can qualify for the loan to whether you should apply. Go through this checklist to see if a home equity loan is the right financial move for you.

Home Equity Loans: How Much Equity Can You Spare?

1. You have equity.

Long gone are the days when you could get a home equity loan that pushed your mortgage above your home's value. Back when the housing market was going gangbusters, traditional and bad credit lenders were willing to bet on property values going up. Not anymore. You'll probably need to have at least 20% equity remaining in your property after you've taken out the home equity loan.

2. You have a plan for paying it off.

Unlike credit card debt, home equity loans are secured by your home. That means your property serves as collateral for the loan; if you fail to repay it, you could face foreclosure. That's why many financial consultants advise against taking out a home equity loan to pay off credit card debt -- the stakes are too high. Unfortunately, many people used home equity loans to consolidate credit card debt, only run the cards back up. Don't consider a home equity loan to consolidate credit card debt unless you've addressed the budgeting problems that got you into financial trouble in the first place.

Shop For Best Rates on Home Equity Loans

3. You qualify for decent interest rates and terms.

Shop among lenders for the best rates and least expensive closing costs on home equity loans, and don't go for the loan unless you can get a rate considerably lower than what you're paying on your credit cards.

4. You plan to use the money for a good cause.

A home equity loan works best for goals that increase your assets, such as education to boost your earning potential or a home improvement project that raises your property's value. Save your money rather than going into debt for fancy vacations, new furniture, and shiny toys.

A home equity loan is a useful financial tool, but it's not the right one for every situation. Consider your finances carefully, as well as alternatives like debt management before tapping into your hard-earned equity.


http://www.kiplinger.com/ / http://www.smartmoney.com/

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