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3 Dangers Of Home Equity Loans

The idea of a home equity loan or line of credit seems like a great idea. After all, you get to tie the payments into your mortgage and since you’re already used to making monthly payments anyway, you feel that adding a little bit more to it wouldn’t be such a bad thing. Now you can take care of that roof or buy new windows and rugs for the house, getting more value out of your house than you presently have. Sounds great, right?

Unfortunately, for most people life isn’t quite that simple. Many find within a few years that the burden isn’t what they were expecting and it can be hard to get out of. Here are 3 things to worry about.

1. You could be approved for way too much money. Remember the first time you got a credit card that approved you for more than $5,000? Remember promising yourself that you would never max that out? How long did it take you to max it out?

The average home equity loan allows you to shoot for anywhere between 50% to 80% of the combined total of what your home is currently appraised for and how much you have left to pay on your home. So, if you owe $50,000 on your home but it’s appraised for $150,000, you could be approved for anywhere between $50,000 to $80,000.

That sounds good until you realize that you now have to pay whatever your normal mortgage is and a separate payment on the home equity as well. Even at a rate of 7% are you ready for large payments like that, especially if you didn’t refinance your home at the same time?

2. In many states, home equity loans are set up with variable interest rates. What this means is that you might start off with a low rate, but it’s always changing based on how the economy is. If you kept up with what caused the housing crisis and saw how many people lost their homes because they couldn’t afford to make payments on suddenly high interest rates then you know what this danger could be.

Suddenly making your regular mortgage payment seems like a great deal. If you’ve spent little on your home equity you’re probably fine, but what if you got one of those large loan amounts and spent a big chunk of it on home improvements, thinking you’d have more time to get the balance down?

3. You could get turned down. I know, you’re thinking so what, at least you don’t have big bills to worry about. Well, it seems credit agencies rank failure to be approved for a home equity loan very high, and it pretty much makes your credit rating and score take a hit. If you were hoping to get a store credit card it’s not happening for awhile, and you’ll have problems even getting a gas credit card.

Lenders have tightened up standards after the financial crises of the previous 4 years so you’d better ask a lot of questions before even considering it if you hope to be approved. However, you also need to know your spending patterns, your limits, and your tolerance for big liabilities.

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