If you have been thinking about applying for a home equity loan or line of credit and are not sure whether you should do so or not, then you should definitely take the time to think about the risks of tapping into the equity in your home before making a decision.
Home Equity Loans Can Help You Cover Unexpected Expenses
If you have been hit suddenly with unexpected expenses or an emergency, then you may be thinking about applying for a home equity loan to cover unexpected expenses. Many homeowners in similar situations tap into the equity of their home when they need extra money to pay for expenses. While applying for a home equity loan in this type of situation is not ideal, experts indicate that it is better to tap into equity to cover expenses and unforeseen emergencies than to tap into the equity of a home to pay for vacations and frivolous items.
Home Equity Loans Can be Used to Increase The Value of a Home
In addition to covering expenses, many homeowners decide to tap into the equity of their home to add value to their house. Many homeowners use the proceeds of their home equity loan to make improvements with the goal of increasing the value of their home in future. Depending on what types of improvements are made, using the proceeds of a home equity loan can definitely increase the value of a home. However, homeowners need to know that things do not always go as planned.
You May Wind up Paying More For Your House Than it is Actually Worth
One of the biggest risks of tapping into home equity is that homeowners often wind up losing money. If a home’s value declines in the future, homeowners are still responsible for paying off the entire loan. This presents a tremendous problem for homeowners who are thinking about selling their home to payoff their home equity loan. If a home’s value declines, then the proceeds generated from a sale may not be enough to cover both an underlying mortgage and an outstanding balance on a home equity loan. If this happens, then the homeowner will have to come up with the funds on his or her own to payoff the equity loan.
Defaulting on Home Equity Loans Can Lead to Foreclosure
Homeowners who are thinking about tapping into the equity in their home also need to think about what will happen if they default on their loan. A home equity loan is a second mortgage on a house. If a homeowner defaults on a home equity loan, then the bank has the right to take legal action and commence foreclosure proceedings. This is true even if a homeowner is current on the underlying mortgage. Should this happen, the bank can commence foreclosure proceedings. As such, failure to make timely payments on a home equity loan can lead to foreclosure.
While there are many benefits to tapping into equity, there are some risks. Before applying for a home equity loan, homeowners should consider those risks. By taking the time to think about the consequences, homeowners will be on their way to making an informed decision.
See Also:
Resources:
- Nolo’s Essential Guide to Buying Your First Home
- The Mortgage Encyclopedia: The Authoritative Guide to Mortgage Programs, Practices, Prices and Pitfalls, Second Edition
- So You Want to Refinance: An Insiders Guide to Refinancing Adjustable Rate Mortgages and Home Loans
- Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan
- The New Reverse Mortgage Formula: How to Convert Home Equity into Tax-Free Income
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