Mortgages & Refinancing

Home Equity

According to a recent article on cnn.com, It's increasingly a sucker's bet to buy more house than you can afford and assume that cheap financing and rising home equity will bail you out. Why? Housing affordability is the lowest it's been in 14 years.

In California, for example, only 14 percent of people can purchase a median-priced home. "This is an unbelievably dangerous time to take risks in the housing market," says financial planner Harold Evensky of Coral Gables, Fla. (a hot market itself ). "It's a great time to build up a good amount of equity in your home."  Be careful when considering using Home Equity for loans or lines of credit, it's always smart to make sure you aren't over-extended in case of a financial emergency, hot home market or not!

Using Home Equity to Consolidate Debt

Thinking about using your home's equity to consolidate debt?
Sometimes it makes good financial sense to use the equity in your home to consolidate debt. Depending on your financial goals, it may be just the thing to do if you want to:

* Lower your total monthly payment amount
* Make your debt tax deductible*
* Pay off your credit cards
* Consolidate many small payments into one
* Reduce the interest rate on your high-interest debt

There are a several ways to access the equity in your home to consolidate debt:

* A cash-out refinance
* A home equity Loan
* A home equity line of credit

When you refinance to get cash out, you're essentially refinancing to a loan amount more than you currently owe and taking the difference in cash. Depending on your current interest rate, you may actually be able to lower your payment and pay off other debt with the cash. It's possible to lower your overall monthly payments with a cash-out refinance.
A home equity loan is a second loan to tap into your equity. Commonly referred to as a "second mortgage," a home equity loan allows you to get cash for your equity without refinancing your first mortgage and usually in less time.
A home equity line of credit is very similar to a credit card except that it uses your equity as the revolving line of credit. You pay only if and when you use the money. You can get a home equity line of credit in as little as ten days.
When you use the equity in your home to consolidate debt, you do not reduce the amount of your debt. Instead, you lower the interest rate you pay. It's important to not run up your credit card debt again. It may be a good idea to close your credit card accounts and keep one for emergencies only. If you increase your monthly cash flow by consolidating, think about saving, investing or paying down your debt faster. Remember, the whole idea was to consolidate the debt, get it paid off, not run it up higher!

NASD Alerts Firms About Liquefied Home Equity Concerns

Notice Reminds Firms That Using Home Equity for Investments Not Always Suitable

WASHINGTON, Dec. 8 /PRNewswire/ -- Concerned about the increasing number
of investors who are turning home equity into cash to make investments, NASD
today reminded regulated firms of their obligation to perform a careful suitability analysis before recommending such a strategy to an investor.
"Many homeowners have become wealthier -- at least on paper -- because of
escalating home values. And more of them than ever before are tapping into
their increased home equity to purchase securities," said NASD Vice Chairman
Mary L. Schapiro. "But turning equity into cash to make financial investments
isn't an appropriate strategy for many investors. That strategy poses
significant and unique risks, and failure to understand those risks could cost
them their biggest asset -- their home."
NASD spelled out its concerns and its recommendations to regulated firms
in Notice to Members 04-89: Liquefied Home Equity. In March, NASD issued an
Investor Alert on the subject, Betting the Ranch: Risking Your Home to Buy
Securities. In May, NASD issued a related Investor Alert on the risks
associated with pledging securities in lieu of a mortgage down payment, 100%
Mortgages: The Low Down on No Money Down.

The concerns outlined in the Notice to Members issued today include:

* The increasing use of home equity for investments. In addition to its
own observations, NASD cites a Federal Reserve Board study that found
that during the most recent period it reviewed -- 2001 through the
first half of 2002 -- 11 percent of the total funds from mortgage
refinancings were used for stock market and other financial
investments. That's up from less than two percent during the previous
period studied, 1998 through the first half of 1999. The average
amount of cashed-out home equity individuals used for investments also
increased substantially -- from "relatively small amounts" in the
1998-1999 period to more than $24,000 in 2001-2002. The average
amount used for investments was greater than nearly all other
categories, including home improvement.

* An investor may lose his or her home if the return on investments is
not sufficient to cover the new mortgage or line of credit
obligations. Or, if the value of an investment decreases, the
investor may need to sell his or her investments to protect his or her
home and limit further losses.

* Investors may fail to recognize potential conflicts of interest, such
as a broker's interest in generating commissions or fees on
investments from the cash proceeds of a refinancing or home equity
line of credit -- or the firm's interest in generating compensation
for itself or an affiliate for originating and/or servicing the new
mortgage or line of credit.

* Cashing out home equity may undermine the asset diversification
benefit of home.

The Notice to Members issued today recommends that, in addition to the
factors typically considered as part of a suitability analysis, regulated
firms also consider the amount of equity the investor has in his or her home;
the level of equity being liquefied for investments; how the investor will
meet his or her increased mortgage obligations; whether the new mortgage or
home equity loan is at a fixed or variable rate; the investor's risk tolerance
with respect to the funds being invested; the investor's overall debt burden,
and the sustainability of the value of the investor's home.
NASD's Notice to Members also includes "best principles" for disclosing
relevant risks and conflicts, including: the potential loss of one's home; the
fact that unlike other potential lenders, the recommending firm has an
interest in having the proceeds of the loan used for investments that may
generate commissions, mark-ups or fees for the firm; the recommending firm or
its affiliate may earn fees in connection with originating and/or servicing
the loan; the impact of liquefied home equity on the ability to refinance a
home mortgage, and the possibility that a change in home value could result in
negative equity in the home.
The Notice to Members also recommends that firms consider whether to
establish general standards for when a recommendation to invest home equity
proceeds should be prohibited -- for instance, when an investor wishes to use
home equity for particularly risky investments, or wants to withdraw home
equity above a specific threshold.
Investors can obtain more information about, and the disciplinary record
of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck.
NASD makes BrokerCheck available at no charge to the public. In 2003, members
of the public used this service to conduct more than 2.8 million searches for
existing brokers or firms and requested almost 180,000 reports in cases where
disclosable information existed on a broker or firm. Investors can link
directly to BrokerCheck at http://www.nasdbrokercheck.com. Investors can also
access this service by calling 1-800-289-9999.

Still Time to Get Tax Deductions

With mortgage rates remaining at 40-year lows, Goodrich said homeowners with large credit card bills may want to consider securing a home equity loan.

''If you have a lot of credit card debt, you might want to use a home equity line of credit to pay that off,'' she said, ''because that interest is tax deductible.''

The average 30-year fixed mortgage rate as of Tuesday was 5.38 percent, according to bankrate.com.
The one caveat to all these deductions is that taxpayers must be able to itemize their returns.

Taxpayers should always consult their tax adviser before making any tax decisions.

Hazardous Home Equity Loans?

From a cautionary article on Home Equity Loans on MSN:

What looks like a great deal, but could turn out to be the most devastating financial decision of your life?

It's when you consolidate credit-card debt by taking out home-equity loans for more than the value of your house, sometimes for up to 125% of the home's value. Unlike traditional home-equity loans that rely on the equity you've built up in your home, these loans aren't tax deductible and usually carry higher interest rates.

By television, direct mail and now by e-mail, lenders are pushing you to consolidate your credit-card debt by borrowing on your home. Here's the text of an actual e-mail I received recently:

Consolidate Debt, Refinance Your Home or Put Cash In Your Pocket! We Have Special Programs with rates starting as low as 2.5% APR 7.22% Special Programs for Self-Employed Borrowers Previous Bankruptcies or Foreclosures OK!! Debt Consolidation - pay off high-interest debts and get the cash you need Second Mortgages - get 125% of your home's value.

The television commercials make it look easy and enticing. A top athlete, like quarterback Dan Marino, offers you the chance to cut your monthly payments, pay off your credit cards and take out extra cash to remodel your kitchen or go on a vacation. But think twice. It's important to understand the risks, as well as the attraction, of those lower monthly payments.

For many people, a home-equity loan is indeed the smart way to borrow. The interest rate is typically lower, and the interest is tax deductible. Plus, home-equity loans are amortized over about 15 years vs. about four years for credit cards. That means the monthly payment on a home-equity loan is far lower than a minimum required credit-card payment.

For example, if you owe $10,000 on your credit card at 15%, you'll probably have a monthly payment of $278. But the same amount owed at 15% on a home-equity loan that's amortized over 15 years results in a monthly payment of only $140. The more you owe, the more enticing a home-equity loan looks. At $20,000 in debt in the same scenario, the home-equity loan costs $280 a month, while the credit card and/or auto debt requires a $557 monthly payment.

The trouble comes when people borrow all their home equity to pay off their debts, but they haven't learned how to manage their money well enough to avoid running up credit-card debts and auto-loan debts again. In fact, the lenders have a name for this process: It's called "reloading." Then, if the economy slows or one of the breadwinners loses a job, the next time you get into credit-card trouble, you could actually lose your house.

Consolidating debts holds tax advantage

Student Loans

If you're eligible, the move can save more on taxes than tapping home equity
By Don Taylor / Bankrate.com

Q. I have student loans at an interest of 7 percent and would like to pay them off. The low consolidation interest rate only applies to current students or future students. I wanted to draw against some of the equity and appreciated value in my condo. What are my options? What is the process I have to acquire the funds I want?

A: While you can use a home equity loan or home equity line of credit (HELOC) to restructure your debt, you should take another look at consolidating your student loans.

According to the FAQ page on the Federal Direct Consolidated Loans Information Center: I. Borrowers that are out of school are eligible to consolidate if they: 1- include at least one Direct Loan, or, 2. - include at least one Federal Family Education Loan and have been unable to obtain a Federal Consolidation Loan with a Family Education consolidation lender or have been unable to obtain a Federal Consolidation Loan with income-sensitive repayment terms acceptable to them.

Current rates on a home equity loan won't be all that much lower than the 7 percent you're paying on your student loans. As I write this the national average for a home equity loan is 6.87 percent. Since your student loan interest may generate a tax deduction on your income taxes, I can't assume that the home equity loan has a tax advantage over the student loan.

A HELOC is a variable-rate loan. Many HELOCs are priced based on the prime interest rate, and the rate on a HELOC will change every time the prime rate changes. Prime is at 4.75 percent and the prime rate changes pretty much in lock step with changes in the targeted federal funds rate. You can follow the prime rate and other leading interest rates using the Rate Watch feature at Bankrate.com.

Should I Use Home Equity Loan to Pay Car Loan?

The Detriot News ran a QA on using Home Equity Loans to pay off Car Loans and concluded:

Home equity may not be the best way to pay off a car loan

Q. Is it smart to take out an equity loan on my house to pay off my wife's car faster?

The car loan has an interest rate of 4.75 percent for 48 months. I could get a loan using the equity in my house at 3.75 percent. I'm very good about paying extra on big debts like this. If I used the equity in the house, I would still make the same-size payment to pay down the loan more quickly. I would be able to write off the interest, correct? Is it worth it?

A: This does sounds like a good deal, doesn't it? Home equity interest is deductible, as long as you itemize. But there are a few catches.

Most people, including about half of all homeowners, don't have enough write-offs to itemize and must take the standard deduction. They get no tax benefit from their mortgages or home equity borrowing.

Even if you do itemize, the plan is flawed. The rate you're quoting is for a variable-rate home equity line of credit. A home equity loan, which typically carries a fixed rate, would be more than 6 percent.

A variable-rate loan would expose you to interest rate increases, and the Federal Reserve has done everything short of taking out full-page newspaper ads to signal that those are coming. Soon, in other words, you could be paying a higher interest rate on your home equity line than you had been paying on the car.

Because interest rates have been so low for so long, many people have forgotten that they can and will rise. Although we probably won't return to the days of 18 percent mortgages, like those that home buyers saw in the early 1980s, short-term rates can bounce up pretty swiftly, particularly if the Fed decides that inflation is a real concern.

Smart consumers are paying down variable-rate debt right now, not taking on more of it.

Free Tools From Quicken Loans

Take advantage of some of the free tools quicken loans provides:

Are you better off renting or buying?

FREE Refinance Guide Plus $300 Coupon

Find out if you should refinance

Home Affordability Calculator will help you determine your price range before you look for a home

Mortgage Calculators show your savings.

Tax Savings Calculator to find out the tax savings associated with home ownership

Home Equity Line of Credit Should Be Used Correctly

Home Equity Loans and Home Equity Lines of Credit ( HELOC ) can be great tools and can help save a lot of money when used correctly to consolidate debt, but continuing our what seems to be our theme lately - use them wisely!

MSN has an article about The 3 Worst Money Moves You Can Make:

Use a home equity loan to pay off credit-card debt
Lenders love to tout home equity loans and lines of credit as a way to pay off your plastic. You’ll even see some personal finance journalists parroting the company line that such loans make sense, because home equity rates are typically lower than the interest rates you’d pay on your cards -- and the interest is usually tax deductible.
...

The only way this maneuver really helps you, however, is if you stop using your credit cards to run up debt. Otherwise, you’re just digging yourself a deeper hole.

Unfortunately, the ability to live within their means is beyond many people. Nearly two-thirds of the people who borrowed against their home equity between 1996 and 1998 to pay off credit cards had run up more card debt within two years, according to a study by Atlanta research firm Brittain Associates.
...

Financial planner Ross Levin of Minneapolis says home equity lending has its place -- as an emergency source of cash. He encourages clients to set up home equity lines of credit, which are revolving accounts that work much like credit cards with variable interest rates, in case they lose their jobs or need quick cash to meet some other dire need. Many lenders will set up home equity lines for you at no cost, and the annual fees are usually minimal.

But Levin, like other planners, is adamant about not tapping home equity to pay off credit cards or anything else that won’t last as long as the debt.

“The people who need to do a debt consolidation (using home equity loans) tend to need to do it again and again and again,” Levin said. These folks never learn to manage their money, and they put their homes at risk in the bargain. While unpaid credit-card debt can be erased in bankruptcy, the penalty for not making your home equity payments is losing your house.

If you’ve already borrowed against your home equity, pay off the debt as quickly as you can. If you haven’t and think you need to, cut up your credit cards first. Don’t use your home equity to pay for luxuries or for anything else that won’t last as long as the loan.

See MSN for the full article.

When to use Home Equity Loan vs. Home Equity Line of Credit (HELOC)

The Delaware Online News Journal has a good article discussing the different uses of Home Equity Loans and Home Equity Lines of Credit as well as strategies to insulate yourself against rising rates for home loans:

Take out a home-equity loan instead. With a home-equity line of credit, you borrow against your home on a revolving basis. You can borrow as much or as little as you need, up to the loan limit. With a home-equity loan, you receive a lump sum and pay it off over a fixed amount of time. The interest rate remains the same for the life of the loan.

Home-equity loans have higher interest rates than lines of credit. The average rate for a home-equity loan is 6.91 percent, according to Bankrate.com. But suppose you need money for a one-time purchase, such as a wedding or car, and you know you'll need several years to pay it off. A home-equity loan offers the security of a fixed rate, says Doreen Woo Ho, president of Wells Fargo's Consumer Credit Group. If rates on home-equity lines go above 7 percent in the next year or two, you'll be very happy with your fixed-rate loan.

Use discretion. Many lenders offer their lowest rates on lines of credit for $50,000 or more, says David Herpers, director of consumer affairs at mortgage lender Amerisave. But just because you have a line of credit for $50,000 doesn't mean you need to use it. One of the advantages of lines of credit is that you can borrow only as much as you need.

If you plan to use your line of credit sporadically, or want to reserve it for emergencies, make sure your loan doesn't have a non-usage fee, Herpers says.

These fees, which kick in if you don't use your line of credit within a specific time period, have become less common, but some lenders still charge them, Herpers says.

Use a home-equity line of credit to finance something that will provide long-term value, such as home improvements or college education, Gumbinger says. Many homeowners use lines of credit to pay off high-interest credit card debt. That's a smart strategy, as long as you resist the temptation to run up more credit card bills.

The National Association of Securities Dealers warned earlier this year that some brokers were advising investors to use their home-equity lines of credit to invest in the stock market.

Investors were told they could earn enough from their investments to generate additional income and repay their loans. But that's a sucker's bet. If your investments go sour and you don't have another source of funds to repay the loan, you could lose your home.

Leave yourself a cushion. Not everyone is sitting on a pile of equity. Home prices have risen much more slowly in some parts of the country and declined in others. Analysts are predicting a slowdown in sales and a moderation in prices in the next few months.

If you don't already have a lot of equity, borrowing against your home in hopes that market appreciation will increase your equity is a dangerous gamble. A decline in your home's value could leave you underwater - owing more than your home is worth. That's a terrible place to be if you need to sell.

You can read the rest of the article at The Delaware Online News Journal. Remember be careful when chosing a Home Equity Loan, a Home Equity Line of Credit (HELOC) your home is likely your biggest investment and nest egg.