Use Home Equity for Cash, Within Reason

With real estate booming and property values on the rise, many homeowners forget that their homes may have appreciated in recent years. You could be sitting on a substantial sum of home equity. If you need the money, why sit on your assets when they could be working for you in a second mortgage? Of course, everyone's financial situation is different--some may prefer to leave their home's value alone rather than take on additional debt. But for others, it doesn't make sense to leave that equity locked up in the walls of a house.

If you suspect your home has appreciated, do some research and find out what comparable homes have been selling for in your neighborhood. If you find you have equity and need to convert it to cash, then explore a second mortgage. You'll have a variety of loan products to suit your situation.

Let's say that you've got $130,000 left to pay off on your home loan, and your house appraises at $160,000. There's $30,000 difference, a substantial sum available to pay for Junior's college education. Or perhaps you were laid off and need the capital to start your own computer consulting business.

The problem is, the standard home equity loan doesn't let you borrow over and above 80% of your home's value. In this case, you'd be capped at $128,000, and that remaining $30,000 in value would not be available. Fortunately, you have other options that let you recapture that equity. One is a 100% second mortgage that lets you borrow up to the full market value. Flexible repayment terms are available. You might want to skip any payments for the first year or two, then take 10 years to pay it off, for example. What's the catch? You must have good credit, and your interest rate will be about 2 percent higher than a standard home equity loan. And don't forget closing costs, including title search, appraisal, and possible loan origination fee, or points (one point is equal to one percent of the loan amount).

Or perhaps you've dug yourself into a deep hole with high-interest credit card debt. You need to consolidate your debt and bring your monthly payments down. You pay your cards on time and have good credit but, unfortunately, you don't have enough home equity built up for a substantial loan. What's the answer? Consider a 125% second mortgage that provides a loan up to 125% of your home's value, also known as a high LTV (Loan-to-Value) loan. This is a potentially risky solution, especially if you're a chronic spend-a-holic. Make sure you're replacing existing debt--don't use the slate-cleaning opportunity to go out and get more credit cards. If structured properly, however, you'll be able to consolidate all those payments into one lower monthly payment, as the ad pitches say. What's the catch? Not all of the loan interest is tax deductible, only the amount up to 100% of your home's value. And the loan terms are usually less favorable. You'll probably pay 3 to 5 points at closing, and up to 15 percent interest. The main advantage here might be slowing down the hemorrhaging. Your main goal is to get your debt payments under control.

Remember that the "buyer beware" rule applies no matter where you shop for and purchase a mortgage--from a savings and loan, mortgage company, bank, credit union or broker. Always shop around. The second rule is to ask questions about closing costs to get the real picture of what the loan is costing you. Make sure to read the HUD Estimate of Settlement Costs and know your cancellation rights.

By Cliff McCreedy