Atlanta Real Estate

Want to remodel the kitchen? Buy a new car? Or are tuition payments just around the corner?

One way to pay for major expenses like these is with a home equity loan. But don't rush into it. These loans, like most things financial, come with the good and the bad. Before signing on the dotted line, here's what you need to know.

Right up front, I want to warn you that although home equity loans are an easy and tax-deductible way to use your house as a source of cash, they are not a good idea unless you are 100 percent confident that you can make the payments. You are putting your biggest asset—your house—on the line and if don't pay back the loan, the bank can foreclose.

On the other hand, if you have a secure job and you stick to a budget, these loans can be a smart way to pay for college, wipe out expensive credit card debt, cover medical bills or undertake a home improvement project that will increase the value of your house. They should never, ever be used to pay for your vacation, finance a junket to Las Vegas or spruce up your wardrobe.

Home equity loans come with a very nice tax advantage: You can deduct up to $100,000 worth of interest payments on your federal tax return, so it often makes sense to move loans whose interest is not tax deductible—for example, car loans or credit-card interest —over to a tax-deductible home equity loan.

Home equity loans come in two flavors: term loans and line of credit loans. Bankers often refer to them as second mortgages because, just like your first mortgage, the loan is secured by your house.

This is a one-time lump sum home equity loan that you pay off over a fixed period of time at a fixed rate of interest. Your payments will be the same, month after month. Once you've received the lump sum, you are not entitled to additional funds. This loan, which is very similar to a first mortgage, enables you to know in advance exactly what your payments will be.

Lenders refer to this open-end home equity loan, which is much like a credit card loan, by its initials, HELOC (home equity line of credit). The lender decides in advance how much you can borrow for a given period of time. During that period, you can tap into your preapproved line of credit when needed. That means you only pay for the money that you actually borrow.

As you pay back your loan, your credit can be used again. For example, you have a $20,000 line of credit and you borrow $10,000. Several months later, you pay back $5,000; you now have $15,000 available.

The HELOC has a variable interest rate that fluctuates over the span of the loan. That means the loan is somewhat unpredictable: The monthly payments vary based on the interest rate and how much credit you have used.

HELOCs can be accessed at any time by check, a special credit or ATM card, or in some cases by phone.

You must have paid back the loan in full when the stated time period is up. At that point, your lender may or may not allow you to renew your line of credit.

The answer is fraught with generalizations and so like all generalizations, there are exceptions. Add your own common sense to my suggestions.

Scenario 1: Your daughter is getting married in six months and you plan to help with the expenses. You know you will need about $6,500. Scenario 2: You and your partner have decided, after years of sharing the same tub and sink, that it's time you each had your own bathroom. Your contractor informs you this will cost approximately $4,250.

These two scenarios call for a term home equity loan, because you know how much you will need, when you will need it and that you must pay both the caterer and the contractor within 30 days—maybe 60 if you're lucky.

A fixed-rate home equity loan, especially with rates so low right now, is also the loan of choice for paying off high rate credit card debt.

Scenario 1: Your son will enter college next year. Tuition at most schools comes due twice a year, for four years. Scenario 2: You want to build a new wing to bring your house up to neighborhood speed. This may also be a four-year program, with payments to various contractors spread out over time. A HELOC works well in both these cases because you can tap into it over a longer time period but only as payments are required.

Neither type of home equity loan is a good idea for young homeowners who are just starting out or anyone who lacks substantial savings and disposable income. Unless you're earning a very high salary and your job is very secure, taking on yet another loan makes it very easy to fall behind on payments and wind up head over heels in debt—and in danger of losing your house to foreclosure.

$TIP: Regardless of your age, the total of all your debt payments—mortgages, credit cards, auto loans, student loans, and so forth—should not be more than 36 percent of your gross monthly income.

Nor are home equity loans recommended for most older people. Once you are living on a fixed income, you don't want to have even one set of mortgage payments, let alone two. And, should you decide to downsize upon retirement, you want to have plenty of cash left over after selling your house in order to buy a smaller one, mortgage-free.

Another word of caution: With the HELOC, when interest rates rise, your payments will also rise. This can spell trouble if your salary or income remains the same.

If you can easily meet monthly payments for both an original mortgage (if you have one) and a second one, and if the need for the loan is a sensible one, then this is a smart time to access the equity in your house. Rates are at historic lows and, like everything else economic, they are cyclical. Eventually they will rise. You'd be wise to lock in your loan before that happens.

Most lenders cap the credit line at 80 percent of the appraised value of your home minus the balance of your mortgage. (Your other debts, credit history and income will also be considered.) Let's say you still owe $25,000 on your mortgage and your house is appraised at $125,000. Your equity or "loan-to-value" then is $100,000. A standard home equity loan would be 80 percent of that amount or $80,000.

Even though some lenders will lend you more, don't go down that path. It may be very difficult to make payments, especially if you lose your job or encounter other hardships, such as serious medical problems.

FOR ADDITIONAL INFORMATION ON THE PROPERTY LISTED ABOVE OR THE TIP PROVIDED
PLEASE FEEL FREE TO EMAIL CHRISSY@CASTLESBYCHRISSY.COM OR CALL ME AT 404.925.5335

North Harbor
6220 Blackwater Trail
$379,000

Tuesday's Tip


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North Harbor6220 Blackwater Trail$379,000

Tuesday's Tip

North Harbor
6220 Blackwater Trail
$379,000