{"id":4094,"date":"2024-06-03T07:34:58","date_gmt":"2024-06-03T11:34:58","guid":{"rendered":"https:\/\/www.deeds.com\/articles\/?p=4094"},"modified":"2024-06-16T10:03:43","modified_gmt":"2024-06-16T14:03:43","slug":"tapping-into-home-equity-puts-a-lien-on-your-deed-consider-the-risks","status":"publish","type":"post","link":"https:\/\/www.deeds.com\/articles\/tapping-into-home-equity-puts-a-lien-on-your-deed-consider-the-risks\/","title":{"rendered":"Tapping Into Home Equity Puts a Lien on Your Deed. Consider the Risks."},"content":{"rendered":"\n<figure class=\"wp-block-image aligncenter size-full is-style-rounded is-style-rounded--1\"><img loading=\"lazy\" decoding=\"async\" width=\"1432\" height=\"704\" src=\"https:\/\/www.deeds.com\/articles\/wp-content\/uploads\/2024\/06\/tapping-into-your-home-equity-puts-a-lien-on-your-deed.jpg\" alt=\"\" class=\"wp-image-4095\" srcset=\"https:\/\/www.deeds.com\/articles\/wp-content\/uploads\/2024\/06\/tapping-into-your-home-equity-puts-a-lien-on-your-deed.jpg 1432w, https:\/\/www.deeds.com\/articles\/wp-content\/uploads\/2024\/06\/tapping-into-your-home-equity-puts-a-lien-on-your-deed-300x147.jpg 300w, https:\/\/www.deeds.com\/articles\/wp-content\/uploads\/2024\/06\/tapping-into-your-home-equity-puts-a-lien-on-your-deed-1024x503.jpg 1024w, https:\/\/www.deeds.com\/articles\/wp-content\/uploads\/2024\/06\/tapping-into-your-home-equity-puts-a-lien-on-your-deed-768x378.jpg 768w\" sizes=\"auto, (max-width: 1432px) 100vw, 1432px\" \/><\/figure>\n\n\n\n<p>Many deed holders have accumulated a lot of <a href=\"https:\/\/www.deeds.com\/articles\/protecting-the-value-in-home-equity\/\">home equity<\/a> over recent years. Financial gurus online often encourage homeowners to tap into it. After all, why not take advantage of a home\u2019s rise in value to get cash and do something on your bucket list?<\/p>\n\n\n\n<p>But handy as they are, home equity loans do come with risks. The personal finance decision-making professionals at <em>Bankrate<\/em> say these loans are best for upgrades to the home itself, or debt consolidation that relieves a homeowner from paying high interest on credit.<\/p>\n\n\n\n<p>Let\u2019s look a little deeper.<\/p>\n\n\n\n<!--more-->\n\n\n\n<h2 class=\"wp-block-heading\">Borrowing Against Home Equity Means Staking Your Home as Collateral<\/h2>\n\n\n\n<p>Deed holders don\u2019t just acquire a roof overhead \u2014 although that\u2019s pretty nice to have. They also have a time-tested basis for wealth-building. As long as markets rise (and <a href=\"https:\/\/fred.stlouisfed.org\/series\/MSPUS\" target=\"_blank\" rel=\"noreferrer noopener\">real estate normally does rise<\/a>, over the long term), real estate becomes a growing source of value called home equity. &nbsp;<\/p>\n\n\n\n<p>So, what\u2019s the risk of putting that value to work?<\/p>\n\n\n\n<p>Let\u2019s start with the worst-case scenario \u2014 not because it\u2019s likely to happen, but just so it\u2019s clear. No one wants to run into trouble repaying a loan or credit line that stakes the borrower\u2019s home. But lenders do reserve the prerogative of foreclosure. There are hurdles that the lender would need to clear first, but sometimes, foreclosure over home equity borrowing does occur.<\/p>\n\n\n\n<p>How could it happen?<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>One way it happens is by cuts in household income. Say the homeowner gets laid off, and unexpectedly runs into trouble repaying the lender.<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Or what if a local real estate market dips? Home values can and do change. Consider a scenario in which a home\u2019s value declines and the owner has a home equity loan (a second mortgage). With two mortgage liens, could more easily get into debt that\u2019s greater than the home\u2019s worth.<\/li>\n<\/ul>\n\n\n\n<p>Simply put, secured debt on a home puts the homeowner\u2019s deed at stake. And if the homeowner goes \u201cunderwater\u201d a lender could self-protectively cut off access to financing.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Home Equity Loans: Risks and Rewards<\/h2>\n\n\n\n<figure class=\"wp-block-image alignright size-full is-style-rounded is-style-rounded--2\"><img loading=\"lazy\" decoding=\"async\" width=\"578\" height=\"382\" src=\"https:\/\/www.deeds.com\/articles\/wp-content\/uploads\/2024\/06\/home-equity-loans-risks-and-rewards.jpg\" alt=\"\" class=\"wp-image-4096\" srcset=\"https:\/\/www.deeds.com\/articles\/wp-content\/uploads\/2024\/06\/home-equity-loans-risks-and-rewards.jpg 578w, https:\/\/www.deeds.com\/articles\/wp-content\/uploads\/2024\/06\/home-equity-loans-risks-and-rewards-300x198.jpg 300w\" sizes=\"auto, (max-width: 578px) 100vw, 578px\" \/><\/figure>\n\n\n\n<p>A home equity loan (HEL), like most people\u2019s mortgages, often carries a fixed interest rate. That makes monthly budgeting straightforward for the whole term of the loan.<\/p>\n\n\n\n<p>What, then, should a borrower look out for? For one thing, the loan will take a brief toll on the borrower\u2019s credit score. That\u2019s because of the added \u201ccredit utilization\u201d the borrower undertakes with the loan. That could make purchases on credit harder. Over time, though, with regular monthly repayment, a HEL can raise a credit score.<\/p>\n\n\n\n<p>What other words to the wise can we relay? It\u2019s usually best, says <em>Bankrate,<\/em> to avoid taking out a home equity loan (HEL) in the following scenarios:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>To buy a vehicle.<\/strong> As a car loses value over time, it is not the kind of investment that pays for the effort, time and interest involved in borrowing against the home.<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>To fund a vacation.<\/strong> The recommended way to do this is to set up a vacation savings fund. &nbsp;<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>To acquire another deed.<\/strong> Real estate can\u2019t easily be sold for cash to handle debts. And taking on an investment property is an inherently risky move. &nbsp;<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>For tuition.<\/strong> There are ways to pay for education without putting a home\u2019s deed at stake. &nbsp;<\/li>\n<\/ul>\n\n\n\n<p>In contrast, borrowing against a home could make the most sense when the borrower needs:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Debt consolidation.<\/strong> If the loan relieves a homeowner from paying higher interest on other credit accounts, it could reduce financial risk overall.<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Home improvements.<\/strong> If the deed holder upgrades the home and increases its value, the loan fees and interest payments could be well worth making.<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Emergency repairs.<\/strong> Many homeowners face major repair costs related to weather extremes. \u201cThe interest on a home equity loan is often tax-deductible,\u201d Bankrate points out, \u201cif the money\u2019s used to repair, rebuild or substantially improve the home.\u201d<\/li>\n<\/ul>\n\n\n\n<pre class=\"wp-block-preformatted\"><em><strong>Note: Don\u2019t forget <\/strong><\/em><a href=\"https:\/\/www.deeds.com\/articles\/mortgage-company-paying-your-property-taxes-out-of-escrow-check\/\"><strong><em>property taxes<\/em><\/strong><\/a><em><strong>. Upgrades to a home can push up taxes along with the property value itself.<\/strong><\/em><\/pre>\n\n\n\n<h2 class=\"wp-block-heading\">Home Equity Lines of Credit: Who\u2019s in Control?<\/h2>\n\n\n\n<p>The market has control over the interest a HELOC borrower pays. This is in the typical scenario, with an adjustable-rate HELOC. So, monthly payments can unexpectedly rise when the Federal Reserve ratchets up the rates. Applicants can speak to their lenders about fixed-rate offerings.<\/p>\n\n\n\n<p>And yet, in this election year, with interest rates presumably poised to drop (no guarantees!), today\u2019s adjustable-rate HELOC applicant could come out pretty well as monthly payments dip. Of course, interest rate action sometimes takes us all by surprise. So it really pays to watch what the <a href=\"https:\/\/www.deeds.com\/articles\/what-jerome-powells-up-to-and-why-home-buyers-care\/\">Federal Reserve<\/a> is doing.<\/p>\n\n\n\n<p>With a HELOC, you do have control over how much of the line you actually use, and how much you pay back, and when. You just need to be sure you make the minimum monthly repayments. With a typical HELOC, the borrower must start paying off interest early on \u2014 in the draw period, which is when the borrower uses the available credit.<\/p>\n\n\n\n<p>Paying off more than the minimum is essential to get the loan principal down. That lowers risk for the borrower when the repayment period starts. That\u2019s when the cash flow shuts off, and the homeowner has to include principal as well as interest in their monthly budget. At the end of the term, the borrower could owe a lump-sum repayment. In short, paying down the principal before you have to can save on interest, and avert a ballon payment crisis when the draw period is over.<\/p>\n\n\n\n<p>Remember, too, that even a HELOC counts as second mortgage and is in the county records as such. This ties up your deed. Should you need to sell your property, you\u2019ll need to have these liens released from your title first.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Effective Risk Management When Your Deed Is on the Line<\/h2>\n\n\n\n<p><em>Bankrate<\/em> offers some great tips for risk management when you borrow against home equity:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Note that any loan includes fees and interest that must be factored into repayments.<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Work out how much money you really need. Limit your debt to that amount.<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Adhere to a budget for paying down a loan balance \u2014 interest and principal.<\/li>\n<\/ul>\n\n\n\n<p>Most importantly, <em>Bankrate <\/em>also says hopeful borrowers should consult their financial advisers to plan out what they can afford to borrow and repay monthly. It\u2019s always important to know how a financial decision can impact your taxes as well as your risk-reward profile.<\/p>\n\n\n\n<p>At the end of the day, using home equity to protect and bolster your home\u2019s value can be a sound strategy \u2014 when due diligence is done. As always, that includes creating a budget, and shopping around for the best rates and terms.<\/p>\n\n\n\n<p><strong>Supporting References<\/strong><\/p>\n\n\n\n<p class=\"has-small-font-size\">Dan Miller for Bankrate, LLC (part of Red Ventures), via <em>Bankrate.com<\/em>: <a href=\"https:\/\/www.bankrate.com\/home-equity\/home-equity-loan-risks-and-how-to-avoid-them\/\" target=\"_blank\" rel=\"noreferrer noopener\">Home Equity Hazards \u2013 The Risks of Tapping Into Your Property\u2019s Value<\/a> (Apr. 30, 2024). See also Mia Taylor: <a href=\"https:\/\/www.bankrate.com\/home-equity\/using-home-equity-to-finance-emergency-repairs\/#statistics\" target=\"_blank\" rel=\"noreferrer noopener\">How Your Home Can Pay for Emergency Repairs<\/a> (Dec. 8, 2023).<\/p>\n\n\n\n<p class=\"has-small-font-size\">Bankrate, LLC (part of Red Ventures): <a href=\"https:\/\/www.bankrate.com\/about\/\" target=\"_blank\" rel=\"noreferrer noopener\">About Bankrate<\/a>.<\/p>\n\n\n\n<p class=\"has-small-font-size\"><em>Deeds.com<\/em>: <a href=\"https:\/\/www.deeds.com\/articles\/need-to-pull-money-out-of-your-home-which-will-work-home-equity-loan-or-heloc\/\">Need to Pull Money Out of Your Home? Which Will Work \u2013 Home Equity Loan, or HELOC<\/a>? (Jun. 9, 2023).<\/p>\n\n\n\n<p class=\"has-small-font-size\"><em>Deeds.com<\/em>: <a href=\"https:\/\/www.deeds.com\/articles\/heloc-how-home-equity-lines-of-credit-impact-a-homes-title\/\">HELOC \u2013 How Home Equity Lines of Credit Impact a Home\u2019s Title<\/a> (Jul. 30, 2023).<\/p>\n\n\n\n<p class=\"has-small-font-size\"><em>Deeds.com<\/em>: <a href=\"https:\/\/www.deeds.com\/articles\/the-big-tease-look-out-for-rising-interest-on-a-home-equity-line-of-credit\/\">The Big Tease \u2013 Look Out for Rising Interest on a Home Equity Line of Credit<\/a> (Sep. 6, 2023).<\/p>\n\n\n\n<p class=\"has-small-font-size\">And as linked.<\/p>\n\n\n\n<h3 class=\"wp-block-heading has-small-font-size\"><strong>More on topics: <\/strong><a href=\"https:\/\/www.deeds.com\/articles\/real-property-basics-what-is-a-clear-title\/\">The importance of a clear title<\/a><strong>, <\/strong><a href=\"https:\/\/www.deeds.com\/articles\/what-you-need-to-know-about-home-improvement-loans\/\">Home improvement loans<\/a><\/h3>\n\n\n\n<p class=\"has-small-font-size\">Photo credits: <a href=\"https:\/\/pixahive.com\/photo\/collateral-for-bank-loan\/\" target=\"_blank\" rel=\"noreferrer noopener\">Akshay Gupta<\/a>, via Pixahive (licensed as CC0); and <a href=\"https:\/\/www.pexels.com\/photo\/a-person-typing-on-laptop-7731373\/\" target=\"_blank\" rel=\"noreferrer noopener\">Mikhail Nilov<\/a>, via Pexels\/Canva.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Many deed holders have accumulated a lot of home equity over recent years. Financial gurus online often encourage homeowners to tap into it. After all, why not take advantage of a home\u2019s rise in value to get cash and do something on your bucket list? But handy as they are, home equity loans do come [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":4095,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[57],"tags":[1454,1452,407,1453,187,185,193,1451,191,179],"class_list":["post-4094","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mortgage","tag-bankrate","tag-debt-consolidation","tag-financial-planning","tag-financial-risks","tag-heloc","tag-home-equity","tag-home-equity-loan","tag-home-improvement","tag-mortgage","tag-real-estate"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Tapping Into Home Equity Puts a Lien on Your Deed. Consider the Risks. - Deeds.com<\/title>\n<meta name=\"description\" content=\"Risks and rewards of tapping into home equity. Understand how home equity loans and lines of credit can affect your financial stability and what to avoid. Learn effective risk management strategies from Bankrate&#039;s experts.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.deeds.com\/articles\/tapping-into-home-equity-puts-a-lien-on-your-deed-consider-the-risks\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Tapping Into Home Equity Puts a Lien on Your Deed. Consider the Risks. - Deeds.com\" \/>\n<meta property=\"og:description\" content=\"Risks and rewards of tapping into home equity. 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