A Home Equity Loan is a Lien on Your House

Debt.  Most of us have it.  Most of us want to get rid of it!

It is estimated that the average American has $3752 in credit card debt.  The average household has an average of $7394.  That is just credit cards.  It does not include car loans, student loans, or mortgages.  While statistics say that amount is a decline from 2009, it is still a significant number.  You can read more about the report here.

Sometimes folks feel so overwhelmed by the amount of their debt, they opt for a home equity loan to consolidate all that debt.  They then have just one payment and probably a lower interest rate too. It can be a good solution, especially if you have lived in your house for several years or plan on staying awhile.

But, what if you have to move?  That home equity loan is a second mortgage on your home.  It is a lien that must be paid off at closing.

Case Study:  James and Linda have lived in a home for two years.  They bought the house for $250,000 and mortgaged $240,000.  In January of this year, they made a resolution to get a handle on their finances.  They decided to get a home equity loan and pay off all their credit cards, Linda's student loan and James' car.  The home equity loan was for $35,000 but that payment was lower than all the others combined.  They would be saving money each month.

On Monday, James learned that he is being transferred!  It is an opportunity of a lifetime!  James and Linda are so excited about their upcoming adventure.  They contact an Edmond REALTOR to get the house listed right away.  The REALTOR schedules a time to go over the listing documents and recommends they have their mortgage payoff information available at the meeting.  Not a problem!

At the listing appointment they learn that the probable sale price for their house is $255,000.  This is not a suprise to them.  They tell the REALTOR that the payoff is about $233,000 and they hope to just break even.  As they are going over the estimated closing costs, they are asked if they have a second mortgage.  James explains that they have a home equity loan.  They are stunned to realize that loan has to be paid off at closing too!  That means that if they sell the house for $255,000, after closing costs are paid they will have to bring $31,000 to closing!!

When considering a home equity loan to consolidate your debt, first consider how long you are planning to live in your home.  Do you have the equity to cover that debt if you sell?  If you plan to move or the equity is just not there yet, this may not be the best option for you and your family.