Whether you are an agent building your business or have clients with muddy financial portfolios, a home equity loan could be a pool of relief from those troubled fiscal waters you’ve been treading.
However, before you take the plunge be sure to weigh the pros and cons of such a leap.
If you have a lot of high-interest debt, it certainly could be a good patch toward financial recovery. You can lower your interest rate and reduce your debt. Consolidation leads to fewer monthly payments, so there is less chance of forgetting a payment over the course of a month.
Home equity loans typically have a much lower fixed rate and come with a set repayment period which helps to keep the amount you spend on interest to a minimum. As an added bonus, interest you pay on a home equity loan is usually tax-deductible since it’s essentially the same as taking out a second mortgage on your home.
But for every action, there is an equal and opposite reaction. Real estate agents should know this pool also has a deep end that can be perilous if you jump in without also considering the potential problems of using your home equity to rebuild credit and shore up your financial house.
First and foremost, a home equity loan is more of a Band-Aid than a cure.
If debt has been created as the result of something unforeseeable, like a job loss or major illness, using your home equity to keep the collectors are bay could be the best solution. On the other hand, if you’re thousands of dollars in credit card debt because you have a shopping addiction or you just never learned to budget, borrowing against your home doesn’t address the real issue and may just perpetuate the problem.
There also is some additional risk involved with a home equity loan.
Your credit cards are unsecured debt and aren’t tied to any specific collateral. If you don’t pay, you very well could end up getting sued but nobody is going to come in to seize your personal property. The home equity loan is backed by your property and if you find yourself unable to make the payments, there’s the real possibility that you could lose the home.
Another risk is that you’ll end up underwater on your home, owing more than it is worth. The less equity you have, the more vulnerable you are to falling home prices.
A home equity loan also comes with fees, which could be as much as 2 percent to 5 percent of the loan value. You also could be required to pay points for a lower interest rate. Maintenance fees are possible with some home equity loans.
Taking a dip into your home equity could be a refreshing change or you could end up trashing in the water in need of another lifeline.
That home equity loan could prove to be the elixir you need, but it may not always be the best medicine. Before you tap your home’s equity, explore at every possible pro and con to minimize the risks.