Disadvantages of a Manufactured Home Equity Loan


A manufactured home equity loan is the amount of money that a homeowner can borrow against the existing equity in their manufactured home. These types of loans do normally have a $100,000 limit but the interest paid on the loan is deductible on the homeowner's income taxes. There are two general types of 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 over the life of the loan which keeps the monthly payments the same as well. These loans usually have a term, or payback period, of five to twenty years and if the home is sold the outstanding balance must be paid off with proceeds from the sale of the home.

A line of credit works a little differently. The loan is a set amount but unlike the fixed rate offering the borrower is able to tap into what is essentially an account that holds the borrowed amount. It works much like a credit card and in many instance a credit card or checks are issued to the borrower so they can withdraw money as they need it.

Most lines of credit have variable interest rates that are dependent on the interest rates during month in which the money was withdrawn. This means the monthly payment can vary from month to month which can adversely affect the homeowner's budget. This must be carefully considered for anyone interested in getting a line of credit home equity loan. The repayment terms are usually the same as the fixed rate offerings.

There are a wide variety of benefits to getting a manufactured home equity loan that include paying college tuition, paying off high interest debts such as credit cards, or making home improvements. But there are also disadvantages that homeowners need to be aware of else they find themselves in worse financial shape then before they took out the loan.

The first thing to consider is how long you intend to stay in the house. Eating 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 are using your current home as a stepping stone to something bigger and better a home equity loan is not a good choice.

Another pitfall is using the money to consolidate debts 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 debt reloading and before they know it they not only owe their loan payment but all the credit card payments are back as well. Unless the homeowner is serious about getting out of debt getting this type of loan is a bad idea.

For the homeowner who want to make home improvements an equity loan can make sense. The thing to watch out for 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 them is a good idea. Two areas that are sure to improve a homes value is a kitchen or bath remodel.

Any time a homeowner is considering taking out a manufactured home equity loan they need to evaluate 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.

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