|
Mortgage News |
Are Home Equity loans good ideas when you want to pay off low debt and do some Home Improvement projects?Borrowing to Pay Debt Consider Low-Rate Home Equity Loans A N S W E R: There are two primary types of home equity loans: term loans and lines of credit. A home equity loan, also known as a term loan, allows you to borrow a lump sum against your equity and pay it off over a period of time with a fixed interest rate. Think of this like a second mortgage. On the other hand, similar to a credit card, a home equity line of credit allows you to borrow up to a certain amount for a set period of time (e.g., $15,000 for 5 years). During that timeframe, you can borrow against your line of credit, pay it back and then borrow it again, providing you with more flexibility than a term loan. Although home equity loans are often considered second mortgages, their lifespan tends to be shorter - five to 15 years versus 30 years for a traditional mortgage. A home equity loan can be helpful in erasing your debt as long as you use the money only to pay down the debt. Interest rates on home equity loans tend to be lower than those on other debts, especially versus credit cards, with the current average at approximately 6.85 percent for a $10,000 loan. As such, if you have $10,000 in debt on a credit card and are paying 18 percent in interest, it may make sense to take advantage a home equity loan. Mellody's Math: If you paid off your $10,000 in debt through your credit card company within 10 years, you would end up paying a total of $21,622, assuming an 18 percent annual percentage rate. However, if you used a home equity loan to pay off your credit card debt, because of the lower interest rate associated with this type of loan, you would pay $13,840 over the same time period (assuming a 6.85 percent interest rate), saving you $7,782. In addition, unlike credit card interest, you may be able to deduct the interest payments on a home equity loan, saving you more money. If you decide to use a home equity loan to pay off your credit card debt, it is critical that you stop using your credit cards to prevent you from building up even more debt. With regards to using a home equity loan as a means to finance home improvements, I do not advise it. According to Freddie Mac, over the past 27 years, home prices have appreciated 5.8 percent a year - only 1.2 percent faster than inflation. Therefore, taking on additional debt to remodel your home will unlikely yield the return you believe you are due. Back to Original Article: Mortgage News You Can Use
Continue with:ECONOMIC DEVELOPMENTThis week in businessHiring Outlook 2004, Part 1Commentary: Cutting Through The Budget SmokeThe Budget: Hey Guys, Get RealSEC May Put the Squeeze on Pricey Index FundsFresh US home sales record seen in 2004-Freddie Mac112,000 Jobs Added, Most In Three Years But Below Forecast
|