Thursday, November 13, 2008

Home Equity - Use It or Lose It?

People who are lucky enough to still have a home equity line of credit are thinking that it may be time to pull out any remaining balance. It seems like a reasonable idea, a way to increase your cash reserves. Besides, with home values dropping, the lender may decrease - or cancel - that equity line. So why not grab that money while you still can?

Even some financial planners are counseling their clients to max out their equity lines. "Banks are reducing their commitment on home equity loans. If you think you will need it, it's a good time to take advantage of it before it goes away," said Bob Kresak, a certified financial planner and managing partner of the Founders Financial Network.

For some, this may be wise advice. By cashing out the equity line and placing the money in a secure account, the funds are now "liquid". That means that they are readily available in case they are needed.

But don't forget that this money is not free. Every penny you borrow against your home must be paid back - with interest. And that's the problem. If the loan against your home's equity costs you 5% interest, but you place it in a savings account that gets you 3% interest, you are losing 2% every month. In addition, the money you borrow will show up on your credit report and may lower your credit score. In fact, if you take out the maximum amount allowed by the lender, this will certainly have a negative affect on your credit rating.

So should you pull all the equity out of your home? The answer is... it depends. Can you invest the funds in something that will give you at least a good a return as the loan costs you each month? Is that investment secure? And finally, are you anticipating an expense (medical bills, college tuition) where the cost of borrowing the money someplace else would be more expensive than borrowing against your home? Like all loans, the home equity line of credit is a financial tool. Just be sure to use it wisely.

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