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Be Cautious With Your Debt
Always Be Very Careful With Your Debt
Spring is the time of year when many people borrow against the equity
in their homes. It is the season to plan and start home improvements and
many families seek loans inbetween April and June for these remodeling
projects and repairs.
People use home equity funds for many purposes: consolidating and minimizing
smaller debts and loans, automobile financing, school tuition, vacations
and weddings. Before you decide to go down this particular financial path,
determine what you need the money for, and is it a valid reason. Then
decide just how much more debt you can handle at this time and in the
Three Approaches to Utilizing Your Home's Equity Are:
· Sell your house and buy a cheaper one and keep the difference.
· Refinance your mortgage at a lower rate and borrow more than
you currently owe, then keep the difference.
· Get a lump sum home equity loan by putting a second lien on your
Always keep in mind that you are using your house to secure this loan,
and if you default on a loan, backed by your house, for any reason - be
it an accident of circumstance or by neglect - you can lose the house.
Note: Even if you declare bankruptcy and default on credit card debt, you
can have all or part of the debt forgiven, not so with your house.
Before being tempted by the tax deductions offered by this type of borrowing make
sure you can follow through and maintain the payments. You do not want to lose
your home for a short-term gain.
Alternatives to Borrowing Against Your Debts Do Exist; You Need to
Examine These Options as Well. Can you sell unnecessary items?
Do you own a boat or an extra vehicle, maybe a jet ski that is languishing
in your backyard? Do you have a 401(k) plan that you can tap into? All of
these can be a source of funds if you so choose.
First, always shop around for an equity loan or line of credit and do a comparison
of the interest rates, fees and rate caps offered by different lenders. If you
have difficulty understanding the terminology and concepts that are being discussed
ask for some clarification or bring along a knowledgeable person.
Second, what is the worst-case scenario should your earning or repayment abilities
be adversely affected? You need to project into the future and consider what will
happen to your ability to satisfy the loan agreement should someone lose their
job, have an accident or become ill for a protracted period of time. Do you have
insurance that can help in these bad times?
People can get into debt trouble because they borrow more than they can comfortably
pay back, not because they chose to spend on the wrong things. Using home equity
to pay off credit card debts is always a big temptation, and once that has been
done, too many people start the cycle over by using their fresh line of credit
on the cards. They then end up much deeper in debt than they were before. Not
getting into this type of bad situation depends on self-discipline and financial
Should You Stay Away From High Loan-to-Value Programs?
There is a lot of debate on the subject of borrowing up to the value of your home
or more than the value of your property itself. Some lenders will allow up to
For most people this is not recommended. If you are not sure of your job stability,
or have no contingency plans should something unforeseen happen to you, its best
that you do not over-borrow, no matter how tempting that may be. There are people,
however, that do have excellent credit and enough income and are better situated
to take out higher percentages based on their higher LTV. Equity loans and lines
of credit can actually keep some people out of bankruptcy. Some homeowners get
equity lines of credit while they still have jobs. Then they will be able to make
use of their credit lines if they do lose their jobs or have an interruption in
their income because of illness or other personal problems. If they do not secure
the line of credit before the problem arises they will not qualify for it after
the problem becomes an issue, and the funds will beyond their reach.