Mortgage Rate News

One of the most common reasons that people get a second home mortgage is for home remodeling. However, with banks pulling back on what they will offer in terms of home equity loans, and Americans in general worried about the economic slowdown, home remodeling is falling in popularity.

I think that the biggest reason is the fact that there is less home equity available. After all, with home prices (and values) heading down, negative equity is becoming more of a problem. There just isn’t enough equity to take out a second home mortgage for improvements. No wonder many mortgage lenders are worried.

Are American consumers finally “getting it”?

I’m a generally optimistic person, so I’m hoping that another reason that home equity loans are falling is because American consumers are starting to take a long, hard look at their finances. This would be a good thing, since an honest evaluation of where one’s finances are headed may result in substative changes in lifestyle.

This would also include the problem of using home equity loans for debt consolidation and to pay for frivolous things like vacations. It is very important that individuals figure out what they can do to start building savings, rather than be constantly spending themselves into debt.

In any case, this is a good thing. Hopefully it encourages home owners to think twice about what they “need” in terms of home equity loans. Quite honestly, this could be a chance for all of us to take a close look at where we could be improving in our personal financial lives.

Although it is worth noting that in some cases, home improvement loans are gaining in popularity. Amongst those with good credit, who are still able to obtain personal loans, remodeling may not be a lost cause.

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Every now and again a reader asks a great question that I feel should be answered for the benefit of all. Today’s question certainly qualifies:

All this talk of recession has me concerned about paying of my credit cards. Should I use a home equity loan to pay them off?

This is a great question, since it comes up so much in terms of debt consolidation. Many ads on TV, despite current worries over the mortgage market, still tout debt consolidation home equity loans as a way to pay off credit card debt.

Advantages to using a home equity loan to pay off credit card debt

There are some advantages to using a home equity loan to pay off credit card debt. There are tax benefits, and the interest is lower than what you are paying on your credit cards. Plus, it helps you get your payments down to one a month, making your personal finances easier to manage. That’s about where the advantages end.

Disadvantages to using a home equity loan to pay off credit cards

There are definite disadvantages to using a home equity loan to pay off credit cards. One of them is the fact that you will have to borrow against your home. This is a tangible asset. You are taking unsecured debt (credit cards) and securing it (with your home). Do you want to risk your home for credit cards?

And, with current mortgage market concerns, you may find that 1. you don’t have as much equity as you thought you did and 2. you could end up in a negative equity situation. Neither of these things is pleasant.

Other options

It is possible to consolidate your debt through other types of loans, or through an agency (watch out for fees, though!). You can also use aggressive debt reduction to pay off your credit cards faster, one by one. Also, if you are very disciplined, you can think about using credit card offers for 0% intro rates to your advantage. But be careful to cancel excess credit cards as you pay them off.

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second mortgage, debt consolidation, aggressive debt reduction

One of the mortgage trends that is not changing is the amount of money mortgage lenders are spending on ads. Especially popular? Cash-out home equity loan ads. Mortgage lenders are encouraging consumers to take advantage of any equity they have in their homes. Despite falling home prices and values in many areas, equity is still present for many homeowners. Here is what the New York Times reports on the home equity loan ads running right now:

…As recently as Jan. 8, Ditech, a unit of GMAC, ran Internet ads telling people they could take cash out of their houses, totaling up to 95 percent of the value of their homes.

And Bank of America still says in online ads that people should refinance to “get the cash you need, when you need it.” Many people who are having problems with their mortgage payments are those who took cash out of their homes as their appraisals rose. When asked about the cash-out ad, Joe Goode, a spokesman for Bank of America, said homeowners still have considerable equity in their homes.

“Taking equity out of one’s home is still a smart way for consumers to finance things like home improvements,” he said.

But is it really that smart right now? Is now the time for a cash-out home equity loan?

Honestly, it might not be the best time for you to take out a cash-out home equity loan. While it may give you some extra cash now, you still have to pay it off later. And most of these types of loans have adjustable rates, so while the second mortgage interest rate may be low now, it is unlikely to remain so. If you decide to refinance to a second mortgage, try to get a fixed rate.

Even using a cash-out home equity loan to get out of debt may be a bad idea. You don’t want to secure your debt with your home. Carefully consider your options before getting a cash-out home equity loan. It may be a good time to buy a home, but decreasing your available equity may not be the best idea at this time.

Tags: home equity loan, home equity, home mortgage loan, home equity second mortgage,
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