The Do’s and Don’ts of Home Equity Loans

Home equity burning a hole in your pocket? You may want to think twice about that boat.

Home equity is a valued resource, and if you have it, you might be tempted to tap that wealth for other purposes. A home equity loan, which allows you to use your home’s equity as collateral, is a great way to do this. But depending on your personal situation, it may not be the right thing to do.

Here’s when a home equity loan makes sense — and when it doesn’t.

DON’T: Fund a lifestyle

Remember when homeowners yanked cash out of their homes to fund affluent lifestyles they couldn’t really afford? These reckless borrowers, with their boats, fancy cars, lavish vacations and other luxury items, paid the price when the housing bubble burst. Property values plunged, and they lost their homes.

Lesson learned: Don’t squander your equity! Look at a home equity loan as an investment — not as extra cash when making spending decisions.

DO: Make home improvements

The safest use of home equity funds is for home improvements that will add to the home’s value. If you have a one-time project (e.g., a new roof), then a home equity loan might make sense.

If you need money over time to fund ongoing home improvement projects, then a home equity line of credit (HELOC) would make more sense. HELOCs let you pay as you go and usually have a variable rate that’s tied to the prime rate, plus or minus some percentage.

DON’T: Pay for basic expenses or bills

This is a no-brainer, but it’s always worth reiterating: Basic expenses like groceries, clothing, utilities and phone bills should be a part of your household budget.

If your budget doesn’t cover these and you’re thinking of borrowing money to afford them, it’s time to rework your budget and cut some of the excess.

DO: Consolidate debt

Consolidating multiple balances, including your high-interest credit card debts, will make perfect sense when you run the numbers. Who doesn’t want to save potentially thousands of dollars in interest?

Debt consolidation will simplify your life, too, but beware: It only works if you have discipline. If you don’t, you’ll likely run all your balances back up again and end up in even worse shape.

DON’T: Finance college

If you have college-age children, this may seem like a great use of home equity. However, the potential consequences down the road could be significant. And risky.

Remember, tapping into your home equity may mean it takes longer to pay off the loan. It also may delay your retirement or put you even deeper in debt. And as you get older, it will likely be more difficult to earn the money to pay back the loan, so don’t jeopardize your financial security.

Related:

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

Originally published February 23, 2016.

Source: zillow.com

Not Managing Your Own Money? At Least Know This.

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You may not be a numbers person and despise thinking about money. I get it. (Although, I suspect you may be underestimating yourself.)

Because of this, if you’re in a relationship, you may be inclined to let your partner take the financial reins and oversee your joint accounts. Often times households appoint a spouse as the “CFO,” or chief financial officer, with the good intention of streamlining all the financial bookkeeping and bill payment under one person’s watchful eye. That system has its merits. “While it would be nice to think that every financial decision in a household were made on a 50/50 basis – real life so often gets in the way,” says Manisha Thakor, Director of Wealth Strategies for Women at The BAM Alliance. “In our modern, busy world ‘divide & conquer’ is often the only logistical way to make sure all financial tasks get done.”

But if you’re not the family CFO and/or not interested in personal finance, it’s never an excuse to turn a blind eye to your money. You risk making ill-informed decisions, taking your finances for granted and being financially vulnerable in the event your partner can no longer oversee the bills for any reason.

To avoid such perils, here are critical areas of your financial life that each person in a partnership should understand no matter what.

Income & Expenses

Do you know how much your spouse or partner earns? Believe it or not, this figure is a blind spot in many relationships. A recent study found that 43% of couples failed to accurately report how much their partner earns.

Another survey found that one in three newlyweds discovered their spouse’s spending habits are different than what they thought.

But if you don’t know how much each of you brings home (and spends) every month, how will you be able to really understand what’s affordable, how long it will take you to climb out of debt or save up for a goal together?

“There’s no need to go into the spending nitty-gritty, so long as the difference between income & expenses is positive, savings goals are being met, and no one is upset at how money is being spent,” says Thakor.

Another reason why it’s key to know how much your partner makes is so that you can better assess your tax filings. Taxes may not be something you like to tackle, but if you do sign a joint return, you should know your combined household income. That’s a line item the IRS zooms in on very closely. Misreporting or under-reporting income is a big no-no. And if you’re both signing those tax returns, the IRS will hold the both of you accountable in the event of an audit.

Your Home Ownership Status

If you own a home with your partner and the mortgage is in both of your names that only means that you’re both financially responsible for the loan. But unless your name is also on the property deed, you don’t technically own the home. This is critical to know because in case you separate or divorce, you may not be entitled to the house or profits from the sale.

Account Access

Your partner may be primarily in charge of paying bills and managing the money, but what if you had to (or just want to) step in and take a look or manage the accounts yourself? Do you know where and how to pay the mortgage if you had to? Can you access your retirement savings and investments online?

“For shared assets you want to know what accounts you have and where they’re kept,” says Thakor. In addition to bank accounts, be sure to keep an updated list of your shared insurance policies and know where and how to access your will.

Your Investment Strategy

How informed are you about the way you’re investing together? You may not be that interested in stock charts and tables, but at least know your allocation and the amount of risk you’re taking together. “Knowing your mix between stocks, bonds and cash, and knowing how much in aggregate fees you are paying (at both a product and an advisor level) are three key drivers of your long term investment success,” says Thakor. Set up a time to review your investments with your partner regularly and make a point to show up to meetings with a financial advisor. And remember, no question is a dumb question!

Credit Scores

If you’re ever planning to apply for a loan or credit card together, it’s best to know each others credit scores so that you can better manage your expectations. If you only assume your partner has a strong 800 credit score (like you), but then get rejected for a joint loan because the score was actually in the 500s, you might save yourself the shock and resentment that will likely soon follow. The earlier you know, the sooner, too, you can work together to help repair his or her credit. Keep track of your credit score on a monthly basis using Mint’s credit score tool.

Have a question for Farnoosh? You can submit your questions via Twitter @Farnoosh, Facebook or email at farnoosh@farnoosh.tv (please note “Mint Blog” in the subject line).

Farnoosh Torabi is America’s leading personal finance authority hooked on helping Americans live their richest, happiest lives. From her early days reporting for Money Magazine to now hosting a primetime series on CNBC and writing monthly for O, The Oprah Magazine, she’s become our favorite go-to money expert and friend.

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Source: mint.intuit.com