There’s no two ways about it: home equity loans are a bad idea.
As the slew of articles, documentaries, and even Hollywood movies have shown in the years since the devastation of the Global Financial Crisis, home equity lending was one of the major catalysts to the worldwide economic meltdown.
People were allowed to treat their homes like piggy banks, unaware of the devastation it could cause should they be unable to make repayments. And yet, despite the widespread knowledge of their dangers; people are still considering home equity loans fair game.
The risks associated with home equity loans are not often highlighted as clearly as they should be by the big banks. Stepping beyond your means and into dangerous territory where you are in over your head is not hard to do.
Here are the top three reasons you should think twice before lending against your home.
#1: Losing your home.
The reason the interest rate on a home equity loan is lower than most other types of loans is that it is secured against your home. In other words, if you can’t make your repayments, the lender can take your home.
Essentially, you’re betting your home on your ability to pay back the debt. Instead, you should consider a loan secured against the asset you’re purchasing. If you default on the repayments, you’ll lose the piece of equipment, but will still have a roof over your head.
#2: Negative equity.
Because adding debt to your mortgage is easy, it can become a habit. While this might be OK while house prices are rising and interest rates remain low, if the former falls and the latter rises, you could end up with negative equity—a mortgage that is higher than the house’s value.
You’ll be deeper in debt and won’t be able to turn to your house to provide relief. A rising variable interest rate could also make it difficult for you to meet your repayments, potentially leading to default.
#3: Increased mortgage rates.
When you add the commercial equipment to your home loan, the size of the loan will obviously increase. Depending on how much it increases, the bank might sting you with a higher interest rate due to you having less equity in the property (this is called loan-to-value ratio).
In other words, the savings on $30,000 worth of business equipment may be outweighed by the extra cost of a higher interest rate on all of your mortgage debt. And this increased home loan size could hamper your ability to re-mortgage in future (should you decide to move house or switch lenders).
So whilst it is tempting to use your home equity, you should be well aware of the dangers involved. The good news is that there are other options available. GoGetta is a financial lending solution that will keep your home safe, and your business off the ground immediately. Or learn how GoGetta can help you with our range of tools and calculators.