Convenience and tax-deductible interest make tapping the equity in your home rather appealing. Just be careful that you don't take a casual view about draining the equity in your home—it could jeopardize your most important asset.
CAUTION: If you fail to make the loan payments, you could ultimately lose your home in a foreclosure.
There are generally two types of such loans: home equity loans and home equity lines of credit.
Home equity loans, sometimes referred to as second mortgages, involve borrowing money and making principal and interest periods over a specified period of time. Here are some features of home equity loans:
Another way to tap the equity in your home is with a home equity line of credit. Instead of borrowing a fixed amount of money at one time, you can establish a line of credit against the equity in your home and draw on the money as you need it. The lender will set a limit on the total amount you can borrow and will issue you checks. It is almost like a checking account, except you have to pay back the money and you must pay interest on the balance due. Following are some features of a home equity credit line.
CAUTION: If you get a variable rate loan, be prepared for the fact that rates may rise—can you handle the resulting increase in monthly payments?
Rule of thumb: Your mortgage payments, property taxes, and homeowner's insurance should not be more than 28% of your gross income; and those costs plus any other debts you have should not be more than 36% of your gross income.
With this type of loan you only borrow when you need the money and you are not required to fill out additional loan applications—just the initial one.