Home equity loans carry risks that can severely damage your credit and even make you lose your home. Tapping into the equity of your home can be a disaster to your personal finances and real estate investing business. These types of loans are based on your primary residence equity, and if you do not pay back the money, the lender can foreclose on your home and leave you with nothing.
The most obvious solution is to pay your bills on time but there are other dangers and pitfalls you should be aware of. You should be informed about these risks involved so that you can prevent yourself from falling victim to the same mistakes many other investors have made.
Just after the millennium, banks allowed home-owners to take out more equity than their home had. Up to 125% of their home’s value was made available. This is known as “over-leveraging”. Now, banks are generally offering up to 90% of your home’s value. The problem with this is that if the value of your home decreases by 20% you will be unable to sell your home without having to pay up. Over-leveraging can limit your choices when it comes to selling your home. When it comes to being successful in real estate, the more options you have, the better.
Monthly Interest Payments
If you are using your home’s equity as a down payment or purchase of a property, you have to take into account the money you will be losing in monthly interest. This will decrease the profit you are making from a property. If you end up using your home equity to pay for real estate, you will need to make sure that the profit margin is great enough to make up for the money you will be losing with the interest rate on your home equity loan.
Adjustable Interest Rates
Another danger of home equity loans is the possibility of having an adjustable interest rate. Different lenders have different rates, terms, fees, and requirements when it comes to loans. If you get a loan from a lender who only offers a loan with an adjustable rate, make sure that you fully understand what that entails and what could potentially happen. You will start with an interest rate that is manageable but that rate can raise every year to a much higher maximum interest rate. Your payments could end up quadrupling over a period of time and leave you barely able to pay the interest.
If you plan on taking out a home equity loan, make sure you know what you are getting in to. Be careful not to take a loan out that is more than the equity of your home. Make sure you take into account the interest you will be accumulating when investing your equity in more real estate. And, finally, be aware of how much an adjustable interest rate can affect the payments you are making on your loan.