Cheapskate Daily: Everything You Need To Know About Mortgages Advice

Are you thinking of diving into the equity of your own home? There was a time, and not so long ago, that it was difficult to get a mortgage or HEL. It was generally considered a risk that no prudent homeowner should consider.

While mortgage lenders used to follow strict guidelines that prevented homeowners from getting in their way, the financial services industry is now encouraging consumers to expand more and more, often to their detriment. There are, however, some things that do not tell you.

1. Equity is a concept, not a savings account. Equity, the difference between what you owe your home and the amount you could sell it for now, is just a number. It is a theory. It is not cash in a savings account. Equity does not become cash until you sell the house and give up ownership. The only way you can benefit from equity and continue to live on it is to commit equity as collateral for a new loan. You promise to give cash to a lender if and when you sell. In the meantime, you agree to make monthly payments. And that plunges you into debt.

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2. You will have a false sense of well-being. Transferring debt to an HEL can bring a false sense of relief. Writing large checks on credit card companies from your loan income seems right, as if you are repaying debts and have achieved zero balances on your unsecured debts. But this is not exactly true. Only transfer your debt. You can breathe. And the old feelings of entitlement are coming to the surface. You start using credit cards again and before you know it, the cards are maximizing again. But now you also have HEL.

3. It can be more expensive. This HEL with a lower interest rate could easily end up costing more than the credit card debt with higher interest rates. The comparison of credit card debt at 16.99% with a HEL at 7.25% may not be as clear as it seems.

4. Expenses of the next deposit. Statistics say that you will live in your home for about seven years. This means that your share capital is the down payment for your next home. If you start snacking on it to pay for a wedding, fancy vacation or college tuition (common reasons for HEL), you can reduce or eliminate your relocation options.

5. There is no possibility of discount. In the past, homeowners taking out equity loans were able to deduct up to $ 100,000 in loan interest from their taxes. According to a US tax bill signed into law by President Trump, this deduction is a thing of the past. The change took effect in 2018, which means that tax year 2017 was the last year homeowners could write off interest paid on a home loan.

6. You could find yourself upside down. Lending to equity can put you in a precarious position if the real estate bubble bursts and home values ​​begin to fall. If your mortgage and HEL together exceed the market value, you may find yourself stuck with a house that you can not afford or sell.

7. You can lose it. People who use home equity loans tend to use them over and over again. They cling to the idea that equity is their money to do whatever they want. They never understand how to manage their money and learn the hard way that the penalty for late payment of equity is to lose their home.

When it comes to equity, here’s the best tip: Watch out, but keep your hands off it. The difference between what you owe and what you own may be the only valued asset you ever know. Keep it with persistence. Do nothing to stop it and everything to encourage its development.

Years from now, when you make the final payment of a mortgage and your house is exclusively yours, you will be grateful that you decided to think for yourself and turn your back on HEL.

Mary Hunt, its founder, writes this column for Creators Syndicate. Post comments, tips or questions on its website. Will answer questions of general interest through this column, but letters can not be answered individually.

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