A home equity loan is the amount of money a homeowner can borrow against the existing equity in their manufactured home. These types of loans typically have a limit of $100,000, but the interest paid on the loan is deductible from the owner’s income taxes. There are two general types of home equity loans available; a fixed rate loan or a line of credit loan.
The fixed rate loan is essentially a second mortgage that works much like a standard mortgage. The borrower receives a lump sum of money, usually in the form of a check, and agrees to pay it back over a certain period of time with interest. The interest rate remains fixed for the life of the loan, which also keeps the monthly payments the same. These loans typically have a term, or payback period, of five to twenty years, and if the home is sold, the outstanding balance must be paid from the proceeds from the sale of the home.
A line of credit works a little differently. The loan is a fixed amount, but unlike the fixed rate offer, the borrower can access what is essentially an account that contains the amount borrowed. It works like a credit card, and in many cases, a credit card or checks are issued to the borrower so they can withdraw money when needed.
Most lines of credit have variable interest rates that depend on interest rates during the month the money is withdrawn. This means that the monthly payment can vary from month to month, which can negatively affect the homeowner’s budget. This should be carefully considered by anyone interested in obtaining a home equity line of credit loan. Payment terms are usually the same as fixed rate offers.
There are a wide variety of benefits to getting a home equity loan, including paying your college tuition, paying off high-interest debt like credit cards, or making home improvements. But there are also downsides that homeowners need to be aware of, otherwise they will find themselves in a worse financial situation than they were before they got the loan.
The first thing to consider is how long you plan to stay in the house. Gobbling up your existing equity with a loan will put a serious damper on upgrading to a more expensive home because you won’t have the cash to make a serious down payment. If you’re using your current home as a springboard to something bigger and better, a home equity loan isn’t a good option.
Another pitfall is using the money to consolidate debt and then continuing the same behavior that contributed to all the debt in the first place. Many people use these loans to pay off their credit cards only to start using their cards again. This cycle is called a debt reload, and before you know it, not only are your loan payments due, but you’ve also repaid all your credit card payments. Unless the homeowner is serious about getting out of debt, getting this type of loan is a bad idea.
For the homeowner who wants to make home improvements, a home equity loan may make sense. The thing to keep in mind is making improvements that don’t add much or any value to the home. Things like landscaping and a sprinkler system may look nice, but they don’t necessarily add enough value that going into debt to do so is a good idea. Two areas that are sure to improve a home’s value is kitchen or bathroom remodeling.
Any time a homeowner is considering a manufactured home equity loan, they need to assess their current financial situation and determine if it will have any negative impact. Only then can they determine if it is a good option for them and their finances.