If you could wish yourself somewhere else, you would. Bills are mounting, the roof is leaking, and you're in the middle of the worst rainy season in recent memory. For the moment, however, you're pressed for time and strapped for cash, and there's not much you can do about these. Then, out of the blue, a lender shoves a mouth-watering offer at you, in the form of a no equity home loan. "Salvation," you think.
Before you jump in and take as much as the lender can give, take the time to mull over this question: is a no home equity loan truly the answer to your financing needs? There is a big gulf of difference between drawing on the value of your home when you get a no equity home loan and exceeding this value.
Consider the following before signing anything:
1. Can you take the risk?
Some experts see no equity home loan as a glossed-over nickname for a high loan to value, or LTV, home equity loan. An LTV loan is one where the loan granted will be equal to, or even exceed by as much as 25%, the mortgage value of your home.
2. Can you handle the interest rates?
Usually, a no equity home loan comes with high interest rates - say, 2 to 6 percent higher than the standard. However, while the rates of no equity home loans are typically higher, they vary depending on a host of factors, such as your credit status, the financing institution, interest rates prevailing in the market, and the loan's structure.
3. Can you take on the added requirements?
In obtaining a no equity home loan, you must take out a private mortgage insurance, or PMI. This adds between 0.5 to 1 percent to your total loan. PMI covers the loan's total amount that is more than 80% of your home's total estimated value but not over 100% yet. This means PMI is tied to 20% of the secured portion of your loan.
4. Can you manage the tax implications?
Home equity loans with interests of up to $100,000 are tax deductible. If you have a spouse and both of you file separate tax returns, divide this amount by two. In high-LTV loans, no benefit like this applies. So, if you take out a no equity home loan, you had better be prepared for tax season because any loan amount in excess of your home's actual value is not tax deductible.
5. Can you live with the inconvenience should you ever have to sell you home?
Suppose you have to sell your house on short notice. The house is valued at $200,000 and you owe $250,000 on it. You have a problem sitting on your lap, and it's the same problem that's lining your pocket. Failure to come up with the full amount you borrowed obviously causes default in your loan financing. Can you say bankrupt without wincing?
So, what now? Water still trickles down the roof, and your bills continue to pile up with clockwork precision. Loans may seem the only oasis in the financing desert, but applying for no equity home loan is not a practical solution to your financial woes. If you truly have to take out a loan to get that roof fixed, look for a hybrid of traditional home equity loan and unsecured personal loan. No equity home loans could fix the leak, but it might cost you a whole house later on.
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