The Do's and Don'ts of Home Equity Loans

Home equity is a valued resource, and if you have it, you might be tempted to tap that wealth for other purposes. A home equity loan, which allows you to use your home’s equity as collateral, is a great way to do this. But depending on your personal situation, it may not be the right thing to do.

Here's when a home equity loan makes sense - and when it doesn’t.

DON’T: Fund a lifestyle

Remember when homeowners yanked cash out of their homes to fund affluent lifestyles they couldn't really afford? These reckless borrowers, with their boats, fancy cars, lavish vacations and other luxury items, paid the price when the housing bubble burst. Property values plunged, and they lost their homes.

Lesson learned: Don't squander your equity! Look at a home equity loan as an investment - not as extra cash when making spending decisions.

DO: Make home improvements

The safest use of home equity funds is for home improvements that will add to the home's value. If you have a one-time project (e.g., a new roof), then a home equity loan might make sense.

If you need money over time to fund ongoing home improvement projects, then a home equity line of credit (HELOC) would make more sense. HELOCs let you pay as you go and usually have a variable rate that’s tied to the prime rate, plus or minus some percentage.

DON’T: Pay for basic expenses or bills

This is a no-brainer, but it's always worth reiterating: Basic expenses like groceries, clothing, utilities and phone bills should be a part of your household budget.

If your budget doesn’t cover these and you’re thinking of borrowing money to afford them, it’s time to rework your budget and cut some of the excess.

DO: Consolidate debt

Consolidating multiple balances, including your high-interest credit card debts, will make perfect sense when you run the numbers. Who doesn't want to save potentially thousands of dollars in interest?

Debt consolidation will simplify your life, too, but beware: It only works if you have discipline. If you don't, you'll likely run all your balances back up again and end up in even worse shape.

DON’T: Finance college

If you have college-age children, this may seem like a great use of home equity. However, the potential consequences down the road could be significant. And risky.

Remember, tapping into your home equity may mean it takes longer to pay off the loan. It also may delay your retirement or put you even deeper in debt. And as you get older, it will likely be more difficult to earn the money to pay back the loan, so don't jeopardize your financial security.

Related:

• Rehabbing a Home? Be Ready for These 5 Costs
• 5 Mortgage Misconceptions Set Straight
• The Counteroffer: Negotiating a Real Estate Deal

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

Originally published February 23, 2016.

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Don't Believe These 5 Myths About Real Estate Agents

Buyers and sellers often enter the market with misconceptions about real estate agents - how we work, how the process works and what the agency relationship is all about.

It’s helpful to point out, without getting too far into the weeds, that in any one real estate transaction, there are most likely two agents: one for the buyer and one for the seller.

Here are five myths (and five truths) about working with both buyer's and seller's agents.

1. Agents get a 6 percent commission, no matter what

Most people assume that their agent is pocketing the entire commission. That would be nice, but it’s just not accurate.

Truth

First, it's helpful to know that the seller pays the commission, and they split it four ways: between the two brokerages and the two agents.

Finally, the brokerage commission isn't fixed or set in stone, and sellers can sometimes negotiate it.

2. Once you start with an agent, you're stuck with them

If you're a seller, you sign a contract with the real estate agent and their brokerage. That contract includes a term - typically six months to a year. Once you sign the agreement, you could, in fact, be "stuck" with their agent through the term. But that’s not always the case.

Truth

If things aren't working out, it's possible to ask the agent or the brokerage manager to release you from the agreement early.

Buyers are rarely under a contract. In fact, buyer's agents work for free until their clients find a home. It can be as quick as a month, or it can take up to a year or more. And sometimes a buyer never purchases a house, and the agent doesn't get paid.

Before jumping into an agent's car and asking them to play tour guide, consider a sit-down consultation or a call, and read their online reviews to see if they're the right fit.

Otherwise, start slow, and if you don't feel comfortable, let them know early on - it's more difficult to break up with your agent if too much time passes.

3. It’s OK for buyers to use the home's selling agent

Today's buyers get most things on demand, from food to a ride to the airport. When it comes to real estate, buyers now assume they need only their smartphone to purchase a home, since most property listings live online.

Truth

First-time buyers or buyers new to an area don't know what they don't know, and they need an advocate.

The listing agent represents the seller's interests and has a fiduciary responsibility to negotiate the best price and terms for the seller. So, working directly with the selling agent presents a conflict of interest - in favor of the seller.

An excellent buyer's agent lives and breathes their local market. They've likely been inside and know the history of dozens of homes nearby. They're connected to the community, and they know the best inspectors, lenders, architects and attorneys.

They've facilitated many transactions, which means they know all the red flags and can tell you when to run away from (or toward) a home.

4. One agent is just as good as the next

Many people think of “agent” as a generic term and that all agents are created equal.

Truth

A great local agent can make an incredible difference, so never settle. The right agent can save you time and money, keep you out of trouble and protect you.

Consider an agent who has lived and worked in the same town for ten years. They know the streets like the back of their hand. They have deep relationships with the other local agents. They have the inside track on upcoming deals and past transactions that can't be explained by looking at data online.

Compare that agent to one who's visiting an area for the first time and needs their GPS to get around. Some agents aren't forthright and might be more interested in making a sale. Many others care more about building a long-term relationship with you, because their business is based off referrals.

5. You can't buy a for sale by owner (FSBO) home if you have an agent

In a previous generation, sellers who wouldn't deal with any agents tried to sell their home directly to a buyer to save the commission.

Truth

Smart sellers understand that real estate is complicated and that most buyers have separate representation. And many FSBO sellers will offer payment to a buyer's agent as an incentive to bring their buyer clients to the home.

If you see an FSBO, don't be afraid to ask your agent to step in. Most of the time the seller will compensate them, and you can benefit from their knowledge and experience.

Related:

• Understanding the Role of the Real Estate Agent
• 5 Myths (and 5 Truths) About Selling Your Home
• Why Home Buyers and Agents Need to Have Each Other’s Backs

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

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A-Frame Cabin With Creekside Soaking Tub – House of the Week

How Renting Out Your Vacation Home Can Land You in Hot Water

Ready to buy that ski cabin or lake house? Renting it out while you’re not using it is a great way to make it happen - but not so fast. Lender rules may not allow it, so here's what you need to know.

Loan types and their rules

The first step to financing your vacation home is understanding what mortgages are available and their rules about renting:

• • Primary residence loans. These loans are the most favorable, and you'll get the lowest possible mortgage rates. These loans require you to move into the home within 60 days of closing and live in it for at least one year. After that, you're free to rent out the home.
  • Second-home loans. These loans have the same rates as primary residences, so your rate will be the lowest it can be, but down payments must be larger - most lenders require 20 percent down. You qualify for the loan using your full primary residence housing cost plus your full second home cost. You can use the home for family and friends, but lenders won't let you rent the home.
  • Non-owner occupied loans. Also called rental property loans, these loans offer rates .25 percent to .375 percent higher than primary residence or second home rates, and down payment requirements typically start at 30 percent. Your lender will let you know if you can use the rental income to qualify. These loans allow you to rent the home and use it when it's not rented.

Beware second-home loans

The best thing about a second-home mortgage is that the rates are the same as a primary residence mortgage. The worst thing is that you can't rent the home.

This is an often overlooked provision of second-home loans, but it's the most important, because if you ever rent your vacation getaway, you’ll violate the loan’s terms.

When you get a loan, there’s a document called the note, which spells out the loan’s amount, rate, payments, and fixed versus adjustable periods. Depending on what state you live in, you'll also have either a mortgage or a deed of trust in addition to your note, which spells out additional loan requirements. (See which states use mortgages versus deeds of trust.)

At first glance, a second-home mortgage or deed of trust seems like it has the same requirements as a primary residence. Provision 6 says you must move in within 60 days and live there for at least one year - then you're free to rent it out. Here's a sample:

However, there's an addendum - called a rider - in mortgages and deeds of trust that replaces this friendly requirement with a new, much more strict requirement saying that you can't rent out the home. Here's a sample:

This language, though hidden deep in the loan documents you'll sign before closing, makes two critical points:

1. You can't rent the home.
2. If you applied for a second-home loan and rent it out, your entire loan balance could be called due and payable by your lender.

Choosing a loan

So, if you plan to afford a vacation home by renting it out, you can’t finance it with a second-home loan. But you’ll need to review non-owner occupied loan options with your lender to meet the objective of using and renting a home that's not your primary residence.

As noted above, this means you'll need to put down a larger down payment, and your rate will be slightly higher. But it's a small price to pay for the flexibility of earning income off of a home that you also use for your own enjoyment.

Top featured photo from Shutterstock.

Related:

• How to Handle Long-Distance House Hunting Like a Champ
• The Counteroffer: Negotiating a Real Estate Deal
• 3 Steps to Buying a Vacation Home With Friends

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

Originally published October 4, 2016.

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