Friday, May 27, 2011

Home Equity Loans: Do the Benefits Out Weigh the Costs?

Welcome to the Financial Success Spotlight, providing financial management information to help move your family toward financial success. This is Dr. Rebecca Travnichek, Family Financial Education Specialist with University of Missouri Extension, with this week’s spotlight.

The Federal Deposit Insurance Corporation (FDIC) this week issued tips to help you shop for a variety of bank products and services by carefully evaluating your needs, contacting multiple institutions and reading the fine print before making a decision. In a special edition of the quarterly FDIC Consumer News, which is entitled “Shop and Save...at the Bank: A Buyer’s Guide to Finding the Right Loan, Credit Card or Deposit Account.” This publication provides information, strategies, and alternatives related to a variety of loans and credit sources.

According to Dr. Rebecca J. Travnichek, one loan, a home equity loan, can be an economical way of borrowing money because the interest rate is typically low and, for many people, the interest paid will be tax deductible. Home equity is the difference between the value of your home and how much you still owe on the mortgage(s). For example: if your home is appraised to be worth $250,000 but you owe $200,000 on your mortgage, your equity is $50,000. There is also a big risk involved with home equity loans. As with any mortgage loan, if you cannot make your payments, you can lose your home. FDIC recommends you consider a home equity product as a last resort. You should explore all other borrowing options first.

FDIC Consumer Affairs Specialist C. Lee Page says, “If a home equity product is not repaid, a creditor likely can foreclose on the home‒to sell the property to pay off what is owed.” Unfortunately, if the debt is not covered by the house sale, you will be responsible for making up the difference. For these reasons, you may wish to seek the assistance of a banker, financial planner or another advisor to research other funding sources.

Given the risks, it’s also best to limit your use of a home equity product to necessities, such as home improvements that will enhance the value of your property. You don’t want to risk your home by using the equity loan to pay for non-necessities, such as a vacation or a new TV.

There are two basic types of home equity products. One is a home equity line of credit, which allows homeowners to borrow up to a maximum amount, usually at a variable interest rate. The other option is a traditional “second mortgage,” which is a one-time home equity loan for a lump sum, typically with a fixed monthly payment.

The goal of FDIC Consumer News is to deliver timely, reliable and innovative tips and information about financial matters, free of charge. The Spring 2011 edition can be read or printed at www.fdic.gov/consumers/consumer/news/cnspr11.

For more information on this or any other topic, contact your local University of Missouri Extension office or email me at TravnichekR@missouri.edu. This has been Dr. Rebecca Travnichek, Family Financial Education Specialist for MU Extension with this week’s Financial Success Spotlight.

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