Real Estate Investing

Home equity debt has become considerably more affordable recently with the many fed rate cuts over the past year, which has a direct effect on mortgage interest rates. Whether a home equity loan or a home equity line of credit, the interest rates on home equity debt can be much lower than many other types of debt – and are typically tax-deductible.

You can lock in the lower interest rates with a home equity loan, which is essentially a second mortgage. This establishes a fixed interest rate on a fixed loan amount as part of a fixed repayment plan over a certain number of years. Interest on a home equity line of credit (HELOC), on the other hand, is typically prime rate or prime plus 1%. HELOCs function much like a credit card. For instance, the average HELOC is $58,800, but consumers do not have to max out their credit line.

One common use – and the originally intended use – for home equity debt is to fund a home remodeling project. This makes sense because the home remodeling project drives up your home’s value, which can ultimately help pay off the loan upon resale. For a one-time remodeling project, a home equity loan may be most appropriate. However, a home equity line of credit may be better suited for an ongoing remodeling project stretched out over several years.

Other uses for home equity debt include a vacation home or debt consolidation. This makes sense if the interest on the home equity debt is less than the credit card debt and if the consumer can exercise financial discipline in paying off the home equity debt. Some use home equity debt to fund a lifestyle that is beyond their normal, day-to-day financial means. This is a recipe for disaster.

Home equity debt is not inherently evil, but there is high potential for disaster. You do not want to mismanage this debt. It’s not fun, it’s not easy, but full attention must be paid to this debt because your house is at stake. The following points should be considered before taking out a home equity loan or line of credit.

-Analyze your financial management patterns. What is your debt-to-income ratio? Are you actively trying to pay off debt or paying off your credit card balance each month? Or are you taking out more and more loans, making minimum payments on all and even running late on some?

-Decide what your total monthly payments will be and whether that is affordable. It should ideally be around one-fourth of your monthly net income (after taxes).

-Decide whether you would rather pay more money per month over a shorter period of time or less money per month over a longer period of time with more total interest payments.

-The total amount of your current mortgage combined with the “second mortgage,” or home equity debt, should not exceed the value of your home.

-Along the same lines, never take out a no-equity home loan where the amount of the loan itself is more than your home is worth. These typically have much higher interest charges and are probably not tax deductible. Ultimately, there is little more stressful than being upside down in your home. It’s a good way to lose money fast.

There seems to be a common social stigma attached to renters, one of financial instability and ignorance. This may be true for some, but certainly not all renters. The simple fact remains that some people are simply not at the right point in their lives to buy a house. The right time differs for everyone, as it can certainly be affected by personal matters. However, there are some key signs to watch for that signal it might be the right time to make the leap into homeownership.

Your mortgage payment would be close to your current monthly rent. If you are managing to get by with a fairly hefty rent payment, you could have a comparable home for the same amount or even less per month. This is especially true when it’s a buyer’s market or that house you’ve had your eye on is still available after several months. Seller desperation works to your advantage.

Your debt is getting smaller. When you are paying off debt, your credit is improving. This helps you secure a loan with a better interest rate. Plus, the last thing anyone wants is to be knee-deep in debt when trying to meet all the unexpected financial obligations of moving and settling into a new home.

Your income is going up. Pay increases, promotions, or more sales accounts and bonuses are always a good sign that a major life change like buying a house is within reach. However, ensure that you are putting the sudden increase in “disposable income” to good use, which leads us to our next point.

Your spending habits are coming under control. Financial discipline is a sure sign of maturity and readiness to take on the responsibility of homeownership. Far too many people buy a house before they’re ready. They lack financial discipline to manage the balancing act of home, living and other expenses. They may begin using their home mortgage as an ATM machine, taking out home equity loans. Or else they may consolidate all their revolving credit loans, like credit cards, into the home loan. None of this addresses the behavior of undisciplined spending. Financial discipline is a must - that means the resolve to make a plan for your money and the determination to see that plan to completion.

You have saved, saved and saved some more. This is another area where far too many people buy before they’re ready. Their home’s maintenance needs fall by the wayside as the money must go to other areas. Eventually, their home may be in such disrepair that their home equity is nil. You must save enough money to handle the necessary upkeep. Then there are closing costs, and a significant downpayment of 20 percent or more will help you pay off your house faster, increase your home equity, and help you escape private mortgage insurance.

Buying a house is a huge commitment. Before proceeding, consider CNN Money’s “Four Questions Homebuyers Should Ask” and MSN’s “Three Worst Reasons to Buy a Home.” Run the numbers honestly and even with an exaggerated financial cushion that will provide for unexpected “uh-ohs”. Follow your gut instinct and decide whether this is the right step for you before you begin touring homes, lest your opinion be swayed by emotion.

It is a well-known fact that bathroom renovations build home equity and attract higher bids from prospective buyers. Why? Because people spend a lot of their life in the bathroom! Who doesn’t want to be comfortable?

But wow, some people are really taking it seriously. The two new hottest bathroom features, according to interior designer and Today Show consultant Sheila Bridges: a free-standing jacuzzi tub and a flat-screen television. Bridges recently appeared on The Today Show, offering a tour of a $78,000 bathroom project offering all that and more, including a gas log fireplace.

People don’t want to get cold feet in their bathrooms, so sub-floor heating coils are a hot trend, no pun intended. Actually, sub-floor heating is also environmentally friendly, though I’m not entirely convinced that concern is foremost for the owners of the $7 million home and its $78,000 bathroom featured on Today.

The average bathroom renovation, according to Bridges, is around $7,000 to $8,000. It’s all about the spa-like features, which are most commonly seen in master baths. We’re talking comfort and style to the point where you won’t want to leave and you’ll fight over whose turn it is to use that particular bathroom. Dressing rooms, makeup vanities, seating areas, spacious showers with dual showerheads, benches and shaving corners.

Maybe your bathroom renovation project is on deck when the tax refund check arrives next year. For inspiration, check out Bridges’ common sense tips for bathroom renovations, as well as one home improvement blogs’ Ten Bathroom Renovation Tips. That blog also features a post about cutting-edge bathroom upgrades, like heat-respondent color-changing shower tiles. Welcome to the 21st Century. May your lavatory be lovely and luxurious.