Seven Ways to Be Home Equity Savvy Lesson 5, 6, 7

5. Get the tax deductions.

Just like with your first mortgage, the interest you pay on your home equity loan or HELOC may be tax deductible -- by up to $100,000 -- even if you're not using the loan for home-related expenses.

Your deduction may be limited if the combined amount of your first mortgage plus any home equity loans totals more than the property's actual value. For more information, check out IRS Publication 936.

6. Borrow no more than you need.

Ideally, I recommend keeping a minimum of 20 to 25 percent of equity in your home to ensure that you have a cushion should you ever find yourself in an emergency where you absolutely need to tap equity. This approach also grants you the peace of mind in knowing that you have some insulation against a declining real estate market.

To calculate your equity, simply take the current market value of your home and subtract all outstanding mortgages and home loans.

7. Don't use your home loans like an ATM.

Over the past several years, lenders have made it excessively easy to pull money out of your house. Many new first mortgages come with complementary pre-approvals for generous home equity lines, often equipped with fast-access tools such as checkbooks and ATM cards.

While these are great tools of convenience, be honest with yourself about whether you're responsible enough to handle the temptation.

The Ultimate Piggybank

Your home is very likely to be the foundation of your financial security. If you live off the equity in your home every three to five years by using it to pay off credit card debt, and then find yourself in a down real estate market like we're currently experiencing, you could wind up owing more on your home than it's worth.

This could lead to you being one of the millions who will lose their homes to foreclosure in the next few years. I don't want that to happen. So please be careful, and think twice before you borrow to pay down those credit cards.

Your home is the ultimate piggybank -- don't break into it unless it's a true emergency, or if doing so can truly help you live a richer life.

Seven Ways to Be Home Equity Savvy Lesson 4:

4. Know your interest rates and terms.

First, shop around for the best rates (check out Bankrate.com or LowerMyBills.com to compare lenders' rates). Then, see if your primary mortgage lender can offer you a deal. But make sure you understand how it works.

For instance, is the loan tied to the prime rate? Is it fixed or variable? Variable rates can hurt if rates keep going up. Determine when that variable rate adjusts and what your new payment amount will be when it does.

Read the fine print: Is there an origination fee (even if you don't use the loan)? Is there a property appraisal or application fee? Will you incur closing costs? Will your payment amount increase if you're ever late? And finally, are there fees if you pay the loan back early?

http://finance.yahoo.com/expert/article/millionaire/41915

Seven Home Equity Tips, Part 3: Learn About Home Equity Loans and HELOCs

By Flexo on Thursday, August 16th, 2007

If you’re going to borrow against your home equity, you might want to understand the different options are available. David Bach in a recent column outlined the differences between home equity loans and lines of credit.

Home Equity Loans. Generally called a second mortgage, this type of loan allows you to borrow a set amount that you receive in a lump sum up front. You pay it back over a specified period (typically 10 or 15 years) in monthly repayments. The interest rate is usually higher than a first mortgage but lower than most credit cards, and fixed for the life of the loan.

HELOC. This stands for “home equity line of credit,” and generally works like a credit card. Your lender assigns you a maximum amount up to which you can borrow. You can use only what you need if and when you need it, up to the limit. Interest is typically variable, but usually lower than credit cards because the credit is secured by your home.

There are slight but important differences between the two types of products, and different lenders will throw in additional twists and turns.

Seven Home Equity Tips, Part 2: Use Equity to Build Assets

By Flexo on Wednesday, August 15th, 2007

If a home equity loan is not ideal for paying off credit card debt, what other options are there for making the most of the cash that would otherwise be locked away? David Bach has a suggestion, and it is his second tip out of seven for dealing with your home equity.

2. Use home equity credit to build assets.

Besides a financial emergency, the most worthwhile reason to tap your home’s equity is for the purchase of, or investment in, appreciating assets. Buy an income-producing property or a second home and you’ve got a great investment.

Adding onto or upgrading your present home can be another good use for your home equity, if done carefully. According to Remodeling magazine, remodeled kitchens and bathrooms usually hold their value the best.

Using Remodeling magazine for an opinion about the value of remodeling a house is like asking a real estate agent if right now is a good time to buy (or sell). The answer will always be positive despite any evidence to the contrary. The evidence is that any amount you use for home improvements will likely not be fully recovered when it is time to sell. If you want to spend money on a new kitchen, a pool, or any improvement that’s not necessary, it should be for the enjoyment of the improvement. I’ve heard people try to “justify” their spending by saying it increases the value of the house, but the amount of that increase will almost certainly fall short of the amount spent. We all lie to ourselves occasionally, so I don’t pass judgment.

It’s a better option to use leverage, like the debt of a home equity loan, to buy assets that increase in value or produce income. That is why you will see savvy real estate investors use home equity from one property to make a down payment on a rental property. There are some calculations that need to take place in order to make sure the property will pay for itself, but this would be a smart use of debt. Bach also suggests using home equity to invest in a business, but this can be risky. Putting your home equity on the line may not suitable for the risk-averse.

Seven Ways to Be Home Equity Savvy [David Bach]

http://www.consumerismcommentary.com/2007/08/15/seven-home-equity-tips-part-2-use-equity-to-build-assets/

Seven Home Equity Tips, Part 1: Don’t Pay Off Credit Card Debt With Loan

By Flexo on Wednesday, August 15th, 2007

Does it make sense to use a home equity loan to pay off credit card debt? As with anything, the answer is sometimes. While proponents of certain mortgage payoff acceleration loans might disagree, David Bach is offering some good reasons to let your home equity build without the burdens of extra loans or lines of credit hanging off your equity.

Here is David Bach’s first tip for exuding savviness with your home equity.

1. Don’t rely on home loans to pay off credit card debt.

In my experience, when people borrow against their homes to eliminate credit card debt, they typically just slide right back into it—at the same level or worse—within two to three years. That’s because even after wiping the slate clean, they don’t change their spending habits. They max out their credit cards all over again and find themselves in an even deeper hole.

Is it possible to use your home equity to pay down debt and then stay out of debt? Of course, but generally those disciplined enough to pull this off don’t let their credit cards run amok in the first place.

DebtFor the record, from what I understand, David Bach’s experience is dealing with people who seek him out for his financial advice. Therefore, he might be exposed to a lopsided view of the general population. It is hard to ignore the fact that a home equity loan at a lower interest rate will sound attractive to anyone with a lot of credit card debt. I say go ahead and consolidate if doing so will only eat a small portion of your equity, but don’t do so until you’re truly ready to get out of debt. That means you’ll need to change your habits, a hard thing to do if you’re not mentally prepared. Some of the points in 6 Steps to Building a Better Snowball might be helpful before playing around with moving credit card balances.

Mathematically, it can be enormously beneficial to consolidate high-interest credit card debt with a low-interest loan. The brain isn’t ruled by numbers in all cases, so if you continue spending more than you can afford, up to your newly restored credit card limits, you’ll just dig yourself a bigger hole. David Bach thinks that this is the most likely case and will prescribe advice for everyone in that fashion, but I believe it depends heavily on the individual.

Seven Ways to Be Home Equity Savvy [David Bach]

http://www.consumerismcommentary.com/2007/08/15/five-home-equity-tips-part-1-pay-off-credit-card-debt-with-loan/