Home Mortgage Refinancing: The Dos And Donts Of Cashing Out Equity

Tips for when it is, and is not, appropriate to cash out equity on your home through an equity loan.

While the stock market has had trouble in recent years, home prices continue to spiral upward, leaving many people with a great deal of equity in their homes. A number of companies aggressively market home equity loans, which seems to be an easy way to get the money you need to upgrade your home or put junior through college. However, cashing out the extra equity in your house doesn't always make sense. Here's a quick guide to the do's and don'ts of cashing out equity in your home.

Home equity loans can be great because they are usually offered at low interest rates, and the interest paid on the loan is tax-deductible. They have a very long payment period, so the monthly financial impact is usually quite minimal. Equity loans are a good idea for large purchases or expenses that would otherwise carry a large interest rate, such as credit cards with APRs that are higher than the loan rate. Or, if you need to lower you monthly debt payments to free up some cash to break the cycle of putting purchases on credit cards, then using a home equity loan can be a good thing.

However, there are a number of situations where a home equity loan is not a good idea. Home equity loans should not be used for relatively small purchases, such as a television set or new stereo system. Although the interest rate may be lower than your credit card, the associated costs of acquiring the loan (such as closing costs and other fees) will offset any savings you may garner. Do not take out a home equity loan unless you are absolutely positive the payments are reasonable and do not place undue financial stress on your household. Just because a loan officer says you qualify for a large loan doesn't mean you can afford to pay it off! Be cautious about borrowing more than what the house is really worth. A number of institutions will offer loans up to 125% of the home value; which means that if you have to sell the house in the near future, you will not only lose all the equity you had built up, but you will owe more than what the house is worth.



If you decide that a home equity loan fits your needs and is an easily affordable option, there are still a few pitfalls to avoid. Don't get a loan from the first person you talk to. Use the internet to research equity loan rates, and be sure to read the fine print: the lowest rates are often offset by a number of extra fees that can take a big bite out of your wallet. When talking to the lender, find out if they require title insurance. Title insurance protects the lender, not you, so if you can find a lender who does not require this insurance, you can save yourself a few hundred dollars. If you are taking the loan out for home improvement purposes, be sure that the loan has gone through and the money is in the bank before you sign any work orders with a contractor. Finally, if you are unsure about the exact amount of money you will need, open a line of credit based on your home's equity rather than taking out a home equity loan. You will then be able to draw upon the line of credit without taking out more money than you need.

© High Speed Ventures 2011