Tuesday’s need-to-know money news

Today’s top story: Choosing between an FHA loan and a commercial mortgage. Also in the news: How to save for a secured credit card deposit, picking a first job based on your debt, and why more people aren’t borrowing home equity.

FHA Loan vs. Conventional Mortgage: Which Is Right for You?
Making the right choice.

How to Save Up for a Secured Credit Card Deposit
Establishing your credit.

Should I Pick My First Job Based on My Debt?

U.S. home equity is back, so why aren’t more people borrowing?
It’s still difficult to borrow.

Q&A: How to get rid of home-equity loan headaches

Dear Liz: We have taken several withdrawals from our home equity line of credit. Now the balance is close to $100,000. It’s the interest-only type. We don’t know how to pay off this amount systematically. Can you help?

Answer: As you’ve discovered, it’s not a good idea to pledge your home as collateral when you don’t know how you’ll pay off the debt. Home equity lines of credit can be an inexpensive way to borrow initially, but the interest-only period doesn’t last forever and eventually your payments will get a lot more expensive.

Many homeowners who tapped their equity before the financial crisis are discovering this fact — and some risk losing their homes. The initial “draw” period where you pay only interest typically lasts 10 years. After that, you can’t make further withdrawals and you’re expected to pay both interest and principal over the next 20 years. Your payments may jump 50% or more, depending on prevailing interest rates.

A better way to use HELOCs is for short-term borrowing that’s paid off well before the draw period expires. If you can increase your current payments to do that, you should.

If you can’t make pay more than your minimum, though, you’ll need to explore other alternatives. You may be able to arrange a cash-out refinance that combines the HELOC balance with your current mortgage and gives you 30 years to pay it off. If not, you can make an appointment with a housing counselor (you can get referrals at www.hud.gov) to see what options may be available to you as a distressed borrower. If you can’t restructure the debt, a short sale or a deed-in-lieu of foreclosure may be a better option than letting the lender take your home.

Student loans may be better than home equity borrowing

Dear Liz: I am almost finished with my associate degree at my local community college and will be starting my undergraduate degree in January. I have been lucky enough to accrue no college debt so far but know I will when I start my bachelor’s degree. I am considering taking out a home equity loan to cover this cost, borrowing around $10,000. I got a great deal on my house and it continues to grow in value even with this economy. Your thoughts on this?

Answer: Home equity loans are actually more expensive than most federal student loans. Home equity loan rates for people with good credit range from 7% to 9% in many areas, while the current rate for direct, unsubsidized federal student loans is 5.41%. Furthermore, home equity loans aren’t as flexible and have fewer consumer protections than federal student loans.

You may initially get a lower rate on a home equity line of credit, but these variable-rate loans easily could get more expensive as interest rates rise.

Not only do federal student loans offer fixed rates, but they provide many affordable repayment options plus deferrals or forbearance if you should lose your job or run into other economic setbacks. You don’t have to demonstrate financial need to get federal student loans, although people with such needs can get subsidized loans with a lower interest rate. Your college’s financial aid office can help you apply.