Home equity line of credit or loan???

iVillage Member
Registered: 01-24-2005
Home equity line of credit or loan???
4
Fri, 10-28-2005 - 11:07am

Hello,


I was wondering if somebody could tell me if this would be a good thing to do.

iVillage Member
Registered: 12-05-2004
Fri, 10-28-2005 - 11:43am

When we refi'd our 1st and 2nd mortgage in early October, I made a comment to the closing attorney that I couldn't believe we'd had such a high interest rate on our Home Equity loan (2nd morgage) because it was at 10%. He told me that 2nd mortgages or Home Equity Loans traditionally range between 9 and 11% interest, so we really didn't have such a bad rate after all.

He said that first mortgages and traditional installment loans are almost always lower interest. :-D

Hope this helps! :-D

Pat :-D

Avatar for colomom99
iVillage Member
Registered: 03-28-2003
Fri, 10-28-2005 - 1:47pm

HI! I'm no expert (read below post about being a goof) but I just got back from the bank and had a choice between getting fixed rate on our current home equity line of credit or getting a 30-year-fixed traditional second mortgage. I chose the 30-year-fixed because the interest was almost the same (6.4 versus 6.2) but the monthly payments were about $150 less. Yes, I know I am paying interest over a longer period of time but our first mortgage is an ARM that will expire in March 2009. At that time we will probably sell the house so having more cash flow in the meantime is a good idea to help pay down other debt.

My biggest problem with lines of credit is I tend to use them. I always say, oh, it's nice to have that insurance, but for me it is too easy to let those balances creep up. Part of the deal with getting such a good rate at our bank and not having to pay any closing costs or appraisal fees is we have to borrow $10K more than the existing loan. Again, I was afraid if I had $10K in a line of credit I would piss it away. With $10K cash back in the 30-year fixed I can just send it off immediately to pay off a credit card and never even see it.

That's just me but again I have no discipline when it comes to money.

Jenny

iVillage Member
Registered: 03-27-2003
Fri, 10-28-2005 - 3:43pm

Honestly, if you can get the debt off your home without paying extra interest, that's terrific. I am extremely cautious of using home equity for ANYTHING except, maybe, under special circumstances, home improvements that truly will improve your home above the cost of the loan.

The thing about home equity loans is, if anything ever happens and you're not able to pay your bills, you could lose your home. No other kind of debt carries that heavy a penalty for failure to pay.

And, as you've noticed, when life changes (maternity leave, loss of raises), a home equity loan can become an unbearable burden.

The reason people say secured debt (loans that are taken out against your home or car are the most common types of secured debt) is better than unsecured is that usually you get a better interest rate, and usually you have something to show for being in debt (like a car or home, as opposed to boxes of clothes that you never get around to wearing and dinners out that are quickly forgotten). Also, secured debt is better for the lender because if you can't pay, they can take something back from you (which is why they offer lower rates, *usually*).

But if the interest rate is the same, the starting balance is the same, and all the terms and conditions are equivalent, then an *unsecured* loan is actually better for the consumer than a secured loan. Why? For the same reason that secured loans are better for the lender--because there's nothing for them to take away should you ever be unable to make your payments.

I'd like to differentiate here between what the money is used for and what it is borrowed against. One reason people say secured debt is better than unsecured debt is that secured debt usually represents money that was spent on something tangible and with significant value--a car or a house. Money spent on a car or house is undoubtedly a better investment, regardless of where it came from, than money spent on ebay and clubs. But once the money is spent, it is better (all else being equal) to have the debt unsecured than secured (and better yet, obviously, if you were able to pay in cash LOL).

So, if it's on the up-and-up (read the fine print) and you can take the lien off your mortgage and pay lower interest to boot, do it!

I second the caveat that you must be very careful not to use the line of credit like cash. Don't add to the debt, or it will never go away.

Good luck and let us know what you decide!

Heather

iVillage Member
Registered: 01-24-2005
Fri, 10-28-2005 - 3:58pm

Heather and my other advice givers......I can honestly say I do understand better now from your posts.