During these times, borrowing money from the bank can be quite the slippery slope. A good way to get yourself in money trouble at a later date is to borrow against the equity of your home. While this may seem like a good idea at the time, it can be a very dangerous business for home owners.
There are a few different ways to borrow against your home equity. The first and most common way is known as a 
Second Mortgage. This means that you are borrowing one lump sum from the bank. You are required to pay this back over time. This can be dangerous if used too frivolously. Many people are so happy to receive the money to use for whatever they need that they don’t pay much attention to the interest rate. If you were to borrow $30,000 dollars with an interest rate of 9.5% over 5 years, you could wind up owing upwards of $50,000. Many people cannot keep up with their second mortgage. When this happens, the bank can take your home.
You can also take out a home equity loan. This is used when you need a specific amount of money for something like a home improvement project. This is quite similar to a Second Mortgage, and can be just as dangerous if you lose the ability to pay it off.
Many people in the current housing crisis were put there because they loaned against their home equity. At one point in time, homes were worth much more than they are now. Back during that time, people took out loans against their home equity. Then, the worth of their home deflated, and they were left owing large amounts of money on homes that were not worth nearly that amount.
When used in moderation, borrowing against your home equity can help you. But when you start to borrow excessively against your home, you can wind up buried in the debt. When this happens, you may lose your home, your credit rating, and the ability to easily receive a loan in the future.
If you have any plans to borrow against the equity of your house, be sure that you will definitely have the ability to pay it off. If you do, this could be a convenient way to get a bit of money to use for things that you find necessary. But if you don’t think you’ll have the ability to pay it off, it would be much better not to take the risk.
Related Content:
- Asset Allocation with a twist or why you should keep 25% of your assets in cash A lot of professional money managers will quote some nobel prize winning economist theory about strategic asset allocation.[For the record, Harry Markowitz won the nobel prize in 1952 by showing that in the long run,...
- Using a Home Equity Loan for an Emergency Fund Most mainstream financial advisors will suggest that you should keep some money aside in a special savings account for emergencies. This seems to make sense, say if thereâs something such as a car accident, an...
- What Does Mark To Market Accounting Mean For You and Your Home's Value? If you're like most people, you've probably heard a new financial phrase in the news called "mark-to-market accounting" and wondering just what it's all about. Mark-to-market is really nothing but a pseudo confusing accounting practice that says you should...
- Making Money in Real Estate with Fixer-Uppers Photo by: Peter Gene This is a guest article by Terry Sprouse, author of the book Fix em Up, Rent em out: How to Start Your Own House Fix-up and Rental Business in Your Spare...
- Your Credit and the Home Equity Line of Credit If you are like most homeowners you have considered using a home equity line of credit to get out of debt with high interest rate credit cards. There are at rate credit cards. There are...
Recent Comments