Five Tips for Borrowing From Home Equity
Home prices have fallen and lending restrictions have tightened up, but there are still times when dipping into your home equity is the right move.
Before you treat your home like a glorified ATM by borrowing against its value, consider these five tips.
Have a Good Reason
Make sure you're spending your home equity appropriately. "Proceeds from a home equity loan shouldn't be used to purchase something that you'll consume, like a vacation," explains Dylan Ross, CFP and founder of Swan Financial Planning in New Jersey. "It's better to use it to pay for an asset, like an addition on your home." That way you have a chance of recapturing some of that value instead of just spending it away.
Have a Plan
A home equity loan uses your home as security. That means if you default on the loan, you could lose your house. Consider laying out how you plan to pay back the loan, including what you'll do in the event that you experience a financial setback, such as a pay cut.
Check Your CreditIt's always good to monitor your credit reports, but consider checking your actual credit score before applying for a loan. Knowing your credit score in advance will give you a better idea of where you stand and can help you negotiate a better rate. (To get a free credit report, check out AnnualCreditReport.com; and to see your FICO score visit myFICO.com.)
Shop AroundRates vary widely between lenders, so it's a good idea to look for the best deals. A search on BankingMyWay.com for rates in California, for instance, reveals US Bank (USB) offers a 60-month loan for 6.24%, while Central Valley Community Bank (CVCY) charges 6.75% on its 60-month loan. Other offers include an 84-month loan from Citibank (C) at 7.4% and a 120-month loan from Sierra Bancorp (BSRR) for 7.577%.
Weigh All of Your OptionsGetting the lowest rate possible is important, but it shouldn't be your only consideration. You may qualify for an unsecured loan at an interest rate just slightly higher than the one on your home equity loan. An extra 0.5 percentage points on your annual interest rate might be a good deal if it helps you avoid the added risk to your home that an equity loan represents.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV