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