Two things have happened to shape the home equity market in Dallas-Ft. Worth over the past two years:

1. The financial collapse has lead to tough times for many folks.
2. Lower interest rates over the last year mean home equity loans have become easier to repay — and therefore a tempting means of dealing with said tough times.

So let’s discuss home equity loans to see if they might be right for you.

Understanding Equity

First, let’s try to understand the difference in two primary forms of equity you can get from your property.

The first — a HEL (Home Equity Loan) — usually functions like a second mortgage. The lender will give you a giant lump sum of money, which you can use in any way you need. You pay back the loan over a fixed period of time (usually ten to fifteen years) at a fixed interest rate (currently, rates are historical lows in order to keep money moving through the slumping economy.)

The second most popular option — a HELOC (Home Equity Line of Credit) — functions more like a credit card. You take only what you need, and pay the smaller loans back (although at somewhat higher interest rates than HEL loans).

Understanding all this, here are some pros and cons to consider:

Home Equity Loan Pros

• Best and Last Option : In the wake of the economic collapse, unsecured loans have been maddeningly difficult to find for many borrowers. So collateralized lending like home equity loans might just be your only realistic option.
• More Money : Even in normal times, a secured loan backed by property will allow you to borrow much larger sums of cash than otherwise.
• Instant Stability : Gaining access to this kind of money can provide a sense of stability now in a very unstable and uncertain economic environment. If you feel like things are only going to improve in the future, it might be a good idea to pay off your current, higher-interest debt like credit cards now.
• Tax Benefits : In many cases, the interest on a home equity loan is tax deductible.
• No Restrictions : You can use the borrowed money for anything you see fit, and stretch it out as long as you need.

Home Equity Loan Cons

• Big Risk : Putting something like your house on the line exposes you in a way that other, more temporary forms of debt don’t. If you don’t pay off a credit card, you could be slammed with fees and see a significant drop in your credit score. But if you don’t pay off a home equity loan, you could lose your house.
• More Money, More Temptation : With so much money just sitting there, it can be tempting to fall into the "I’ll pay it back… eventually" mindset. It’s also tempting to borrow more than you actually need, or to rely on loan money instead making necessary cuts to your lifestyle.
• Unexpected Penalties : If the market crashes after you take out a loan, you could be stuck with negative equity. But in Texas it is required for you to have at least 20% equity in your home after getting an equity loan so Texas is the safest state to get a home equity loan when it comes to keeping equity in the home.
• Endless Debt : A home equity loan can be used to effectively make your first mortgage’s payments smaller. But that stretching out of the mortgage means you’ll be in debt longer, despite the benefits of having smaller monthly payments.

In the end, of course, it’s up to you — what you can afford, how willing you are to take on risk, and what the financial future looks like for you. So we’ll help you make the right decision. Contact our home loan experts for information.