Timing of home equity loan

June 26, 2006 2:40 PM

How soon is too soon to get a home equity loan?

We've been in the house one year. I am already getting home equity loan solicitations, practically every week.

How soon is too soon to take out a home equity loan? Yes, it's a lot of money. But we (meaning he) has OLD debt at sky-high rates I'd love to pay off, as well as some remodeling projects our house desperately needs.

I am aware that banks have rules about how soon/how much has been paid before they will allow a loan. I am just curious as to the conventional wisdom regarding the notion of borrowing against a house that we've only been in 12 months, give or take. Is it poor judgment?

posted by I_Love_Bananas to work & money (6 answers total)

I would say it depends on your ability to repay.

Refinancing a higher interest debt is a good idea if you're already making payments on that debt.

Remodeling is only a good idea if you can pay for it - an equity loan isn't free money.
posted by GuyZero at 2:49 PM on June 26, 2006

Do you actually have equity in your home? i.e. is the amount outstanding on your mortgage significantly less than the current value of the house?

If yes, then yes, you could - and if you have other debts at a higher interest rate than your mortgage, then you probably should. How long you've been in the house is pretty irrelevant IMO.

Caveats - where are you based? Are interest rates likely to increase over the next couple of years? Could you afford to pay the increased monthly payments if they did? There's a big difference between defaulting on mortgage payments and defaulting on personal loan payments / credit card payments. One involves losing your home, the other doesn't.
posted by bella.bellona at 2:52 PM on June 26, 2006

Historically you are unlikely to change comsumptive behavior by borrowing more money. The wore "desparate" doesn't typically apply to remodeling. And out of curioisity, are you in one of thoe 0-down loans to start with? Debt is never good. Why don't you check out DaveRamsey.com. You don't need to buy his books or materials. Listen to his show for a month of two and you'll know 99% of what he has to teach you, but he has a lot of valuable advice about debt. Basically it's that you should get out of it as quickly as possible and then avoid it at all costs.
posted by JamesMessick at 3:03 PM on June 26, 2006

The only reason you should do this is if 1) the old debt is at a crazy high rate, 2) you must pay it off, and 3) the terms of the loan allow you to use it in this manner. Otherwise taking on additional debt for remodeling while you have old debt and the mortgage to contend with is a bad idea. In addition, if you're not paying off old bills, it hurts your credit, but if you start to fall behind on the mortgage or home equity loans, you could lose your home. I am not a financial planner or indeed all that good with money, but I know bad ideas when I see them.
posted by Optimus Chyme at 3:39 PM on June 26, 2006

What Optimus said...

Look past the industry hype and understand that you aren't magically "unlocking" your money or anything. You're really just using your home as collateral on a personal loan. Personally, it would have to be the right combination of bad circumstances to make me put my home on the line for anything. Something extreme like a dire medical emergency. remodeling doesn't cut it.
As for the old, sky-high debts...I'd suggest talking with the lender and see if you can't negotiate a better payment plan before I'd go putting my home up on a loan.
posted by Thorzdad at 6:14 PM on June 26, 2006

Keep in mind that there is some risk in converting unsecured debt (e.g. credit cards) to a HELOC. If you default on credit card debt the banks will get all pissy with you, ruin your credit rating, and eventually sue you for the balance. If you default on a HELOC, in addition to the above there is a real possibility that you'll have to give up your house -- the house is collateral for the loan, so if you don't pay, the lender gets the house. (Or else you have to sell the house to cash out your equity and pay off the HELOC.) So I'd have a few months' HELOC payments in savings just in case, because that's a pan either way.
posted by kindall at 8:16 PM on June 26, 2006