| Americans saw the value of their homes
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| | difficult to squeeze in credit-line
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| jump an average of 13 percent over the
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| | repayments now, you may risk missing some
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| past year, according to the Office of
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| | repayments altogether when interest rates
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| Federal Housing Enterprise Oversight.
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| | go up.
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| This has made it easier than ever for
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| | Also, depending on the terms of your
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| many homeowners to qualify for a home
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| | particular HELOC, you may be required to
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| equity loan or line of credit.
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| | pay only the interest accrued each month.
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| With their low interest rates, these
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| | On the upside, this means your minimum
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| secured forms of credit can be your most
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| | payments will be low during the
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| effective way to borrow money. Plus,
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| | interest-only period. On the downside,
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| loans of up to $100,000 often offer the
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| | you will not be rebuilding any of that
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| added benefit of being tax deductible
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| | valuable home equity you've just borrowed
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| (check with your tax advisor). But it's
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| | against.
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| important to choose the right home equity
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| | When the interest-only period ends, you
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| loan for your needs and to use it wisely.
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| | will be faced with one of two scenarios.
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| Smart Borrowing
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| | You may be required to begin paying back
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| Financing a renovation that will add
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| | the loan principal (the original amount
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| value to your home, such as a new kitchen
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| | you borrowed). That means your monthly
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| or a second bathroom, or helping with
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| | payments will increase, and if you don't
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| your child's college tuition, are valid
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| | have enough cash coming in to cover those
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| reasons to borrow on the strength of your
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| | larger payments, you could be in trouble.
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| home equity. This is especially true
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| | Or you may be facing what's called a
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| since the borrowing costs are generally
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| | balloon payment, meaning you must pay the
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| much less expensive than debt that is not
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| | entire outstanding balance of your HELOC
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| secured by collateral.
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| | in full.
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| By the same token, shifting hefty
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| | Always try to pay more than the minimum
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| balances you owe on credit cards to a
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| | each month, so you are constantly
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| home equity loan can be a good move. Your
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| | chipping away at your loan principal.
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| credit cards are likely charging annual
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| | Home Equity Loan
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| interest of 13 percent or more, so
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| | A home equity loan has a fixed interest
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| consolidating that debt with a home
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| | rate. You receive the full amount of the
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| equity loan can easily slash your
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| | loan in a lump sum, which makes it a good
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| borrowing costs in half.
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| | choice for large, one-shot expenses, such
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| Remember though, the idea is to eliminate
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| | as a home renovation or debt
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| your debt, not make room for more of it.
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| | consolidation. And because you must pay
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| A home equity loan isn't free money. At
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| | it back in regular increments over a
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| the end of the day, your home is what's
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| | specified period of time -- often 10 to
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| backing the loan. So if you miss
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| | 15 years -- a home equity loan offers a
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| payments, the lender could take
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| | measure of built-in discipline for those
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| possession of your home.
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| | who may be tempted to use the
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| There are also important differences
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| | "interest-only" payment option offered by
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| between a home equity line of credit and
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| | some HELOCs.
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| a home equity loan -- differences that
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| | At the end of the repayment schedule, a
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| can help you determine which is a better
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| | home equity loan will be repaid in full.
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| choice for you.
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| | Loan-to-value ratio The general rule is
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| Home Equity Line of Credit
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| | you can borrow 75 to 80 percent of your
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| A home equity line of credit (HELOC)
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| | home's current appraised value, minus
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| allows you to use as much or as little of
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| | what you owe on your first mortgage. This
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| your pre-approved limit as you like.
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| | is called the loan-to-value ratio (LTV).
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| Plus, you are charged interest only on
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| | For example, if your home is worth
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| the portion of credit you are currently
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| | $200,000 and you owe $100,000 on your
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| using, which keeps borrowing costs low.
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| | current mortgage, you could borrow an
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| The rate of interest floats slightly
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| | additional $60,000 and still be within an
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| above the prime rate.
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| | LTV of 80 percent. Staying within the
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| This flexibility is helpful if you're
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| | sensible 75 to 80 percent range will help
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| looking to do a series of small home
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| | you avoid repayment problems down the
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| renovations over a long period of time,
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| | road. However, some lenders have begun to
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| or perhaps finance the start-up of a
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| | offer a "high-LTV" option in which you
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| home-based business.
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| | can borrow up to 125 percent of your
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| * The advantage: If the prime rate
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| | home's equity. Beware: If you decide to
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| decreases, your cost of borrowing will
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| | move because of a job transfer or other
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| become cheaper, and interest rates are
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| | reasons, the sale of your home may not
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| still very low compared to previous
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| | provide you with enough money to pay off
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| decades.
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| | both your mortgage and the outstanding
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| * The disadvantage: If the prime rate
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| | home equity loan.
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| increases, your borrowing costs will
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| | Borrowing conservatively is always wise.
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| increase as well. If you find it
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