financial planning

5 Home Equity Myths Debunked So You Feel Confident in Your Equity Plan

Uncover the truths to common myths about home equity loans to empower yourself with the knowledge necessary to effectively leverage your home’s equity as a strategic part of your financial plan.

To those who may feel overwhelmed by homeownership, wondering is owning a home worth it: You're not alone. When it comes to leveraging the value of your home through a second mortgage, HELOC, or refinancing to secure better terms, the landscape can seem complex and filled with both opportunities and pitfalls.

From references littered throughout western media painting second mortgages in a bad light, to our real and current economy where interest rates dictate so much of our financial health, it's crucial to arm yourself with knowledge and strategies to maximize your resources effectively. Understanding how to use home equity as a financial tool can transform it from a source of stress into a powerful lever for dictating your own financial freedom.

Let's debunk common myths to shed light on how to leverage equity in a home to your advantage, ensuring you're making informed decisions that propel you forward.

myth #1: second mortgages are a last resort

Many people think second mortgages are only for those in dire financial straits. Look at a wide array of TV shows and movies where characters turn to a second mortgage to deal with major turmoil or life necessity–Walter’s medical bills in Breaking Bad, multiple Homer mistakes in The Simpsons, Ghostbusters when they mortgage Ray’s house for the business, and on and on through the annals of time. Frankly, it’s hard not to be convinced that a second mortgage is a harbinger of financial ruin. 

While these references point to some truths about how life can drag us into debt, they’re also extreme dramatizations of complex scenarios. The truth is that, while debt should be avoided as much as possible, having equity is a major benefit of homeownership because you gain a low-interest, strategic tool that can be used for all sorts of scenarios like consolidating debt and home improvements, saving you money in the long run. It’s about smart financial planning, not desperation.

myth #2: you’ll lose your home if you take out a second mortgage

The fear-mongering around losing your home is real but overstated. Yes, a second mortgage is secured against your home, but as long as you manage your finances wisely and understand your repayment capabilities, it’s a manageable risk.

There are also a lot of regulations for lending practices to protect consumers from taking on unmanageable debt. It’s all about being honest with your financial situation and informed decision-making.

myth #3: second mortgages and helocs are the same

We’re often asked, “Are second mortgages and HELOCs the same?” While both use your home’s equity, they serve different purposes and have different terms.

A HELOC (home equity line of credit) offers flexible access to funds–think credit card but with your home equity– but typically comes with a higher, variable interest rate; whereas a second mortgage provides a lump sum at a fixed rate, ideal for big, one-time expenses and debt consolidation. Understanding the nuances can help you choose the right option for your needs.

myth #4: refinancing your first mortgage is always the better option

Refinancing can be a great move, especially when rates are low. However, it’s not ALWAYS the right solution.

Here’s an example: Your stovetop oven dies, the rest of your kitchen appliances have a foot and a half in the grave, and Lowe’s is offering a deal to bundle-buy them together, saving you 40% on normal sticker price. You don’t have enough in savings to cover everything plus keep your emergency fund stable, so you look at the financing options.

You wouldn’t want to refinance your full mortgage to the higher rate when all you need is a small portion of your equity. Here are a few reasons why:

1. It could drastically increase the amount of interest you pay.

2. It would likely increase your monthly mortgage payment–unless you’re extending your term, which is best to avoid when possible.

3. While you do typically pay closing costs on a second mortgage, the costs are much lower compared to refinancing your whole mortgage amount.

A second mortgage might better fit your financial strategy depending on your current mortgage, interest rates, and financial goals.

myth #5: applying for a second mortgage is too complicated

I won’t lie; there’s paperwork involved. But with the right guidance and support, it’s far from an insurmountable process. Most required documents are available online, and it’s not a strenuous process to access them; also, you don’t have to have everything ready all at once.

Apply with nothing, and your mortgage rep will tell you exactly what you need. Credit unions, in particular, are great at supporting their members through these decisions.

The truth revealed: Managing home equity through second mortgages or HELOCs doesn’t have to be a daunting task reserved for the financial elite. With the right knowledge and strategic planning, you can leverage these tools to your advantage, empowering yourself to make informed decisions that elevate your financial wellbeing.

Don’t fall into the money pit of despair over high interest and debt. You can climb out, using your home’s equity as the ladder to your dreams and financial freedom.

Ready to turn your home’s equity into your advantage? Apply for a SunWest Second Mortgage today and confidently navigate your path to financial freedom.

April 4, 2024

Published by SunWest Credit Union

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