Home Equity Loans



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Sunday, March 26, 2006

Home Equity Loans

Home equity loans - The Pitfalls of Releasing the Equity In Your
Home

By Joseph Kenny

House prices have been rising fast all over the UK over the last
couple of years. Many people are experiencing a significant
increase in their overall wealth as a result. In the United
States, this has been termed the 'wealth effect' with an
increase in the value of people's homes being recognised as
creating the confidence among consumers to borrow and spend more
money and thus fuel the economy. The very same trends can be
witnessed in the UK where people are using the equity in their
homes to pay for more and more luxuries.

Basic Concept of Home Equity

The way this works is quite simple. Supposing you take out a one
hundred per cent mortgage and buy a home for one hundred
thousand pounds. Since you borrowed one hundred thousand, and
spent one hundred thousand, you will have a net equity of zero,
since your assets (the house) are equal to your debts (the
mortgage). However, with increasing house prices, it is common
for such a house to be worth say one hundred and fifty thousand
pounds after a few years. This will now leave you with a
positive equity of fifty thousand pounds, since you still only
owe the bank one hundred thousand, or in fact probably less by
now. You have increased your wealth by fifty thousand pounds
without actually doing anything.

Unlocking the Equity

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This extra wealth does not have to stay locked up in your house.
What you can do is go to a bank, and ask them to lend you fifty
thousand and secure it over the extra value in your home. If you
do this, you will not have higher mortgage payments as the
amount you owe the bank is higher, but you will also have fifty
thousand pounds to spend as you wish.

Re-Invest In The Home?

You do not have to spend it all at once, but many people pay for
home improvements or extensions with the money. This is
generally a good idea, as since the debt is long term, you
should spend it on something that will benefit you in the long
term, and probably further increase the value of your home.
Other people may spend the money on cars, shopping sprees and
holidays, which may not be such a wise decision as you will be
repaying the mortgage over the next twenty five years, but will
have spend all of the money within a couple of months.

While the choice of how to spend the money rests with
individuals, the fact of the matter is that more and more people
are taking advantage of the equity in their home in this way.

Dangers of Home equity loans

Everything is rosy in the garden at the moment, but what would
happen if you unlocked your equity, had the time of your life
travelling around the world only to come back home to find that
you have lost your job? In the example above you would not only
be one hundred thousand pounds in debt, there would be another
fifty thousand - the equity that you have just spent. This will
result in increased mortgage payments that you will struggle to
pay without any income.

The Housing Market Collapse

However, the most disturbing factor involved would be a change
in the direction of the housing market. You may believe that
your home is safe and can't lose value in an economy that never
stops growing, but it can. During the Eighties in the UK we
witnessed just that. In the first few years a fantastic boom
were everyone seemed to have money, times were good, then
suddenly the interest rates begun to rise in an attempt by the
Bank of England to curb spending. Mortgage repayments for almost
every household in the UK also increased and people started to
downsize their homes in an attempt to decrease their monthly
payments. The housing market became static and prices fell,
pushing peoples mortgages into negative equity.

Precautions in Home equity loans

What this article hopes to impose on you is that you should
never rely on any outside factors for your home. As any Las
Vegas gambler will tell you, never 'gamble' with a with things
that you can't afford to lose. If you are considering a home
equity loan then you should use the money carefully, the optimum
use (and most common) is to re-invest in your home, increasing
its' value.

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About the author:
Joseph Kenny writes for the UK Loan Store, visit them here, http://www.ukpersonalloanstore.co.uk and more information on http://www.ukpersonalloanstore.co.uk/home_loans_doc.html available on site.

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