Armchair Millionaire Community Bulletin: The Bottom Line on Home Equity Debt

Depending on your circumstances, tapping your home equity can be a brilliant financial move or just plain dumb. Before you raid your most important investment, be sure you know the rules.

New York, New York (PRWEB) September 27, 2005 -- As evidenced by the fact that, according to the FDIC, Americans have nearly $534 billion in home equity debt, its clear that millions are taking advantage of low interest rates and growing home values to borrow against the equity in their homes.

A sampling of comments from members of the Armchair Millionaire community shows just a few of ways these loans can be used:

I used my home equity loan to buy four acres of mountain property in Colorado for my retirement home. I'm 42, and hope to be able to move there in 10 or 12 years." --Stacy

We have an equity line of credit that we used for consolidation of our credit bills and to remodel our bathroom." --KimR

I took out a home equity loan to pay off debt and make updates to our home--new central air-conditioning unit and a new kitchen." --Corinne

But just because so many people are doing it doesnt always mean its a good idea to borrow against your equity. There are real risks, including the possibility of a downturn in home values, which could make it difficult to pay off your equity loan and your mortgage if you choose to sell your home.

Risk like this means that you should only borrow against your home equity when youll use the money for something productive, such as making a home improvement, paying for a childs education or paying down high-interest credit card debt. Its not a good idea to borrow in order to simply splurge or to raise your standard of living.

If you do choose to borrow against your homes equity, be sure you know exactly what type of loan is right for you. There are two types: home equity loans and home equity lines of credit (often shortened to HELOC"). My guide tells the key differences between the two.

The Armchair Millionaires Guide to Home Equity Debt

The basics. Home equity loans are lump-sum loans, meaning that you receive the entire amount of the loan all at once. Home equity lines of credit are revolving loans--like credit cards--that allow you to borrow any amount up to a set limit (often by simply writing a check or requesting an electronic transfer).

Interest rates. Interest rates on home equity loans are fixed for the life of the loan. This provides you with the certainty of always knowing what your payments will be. Interest on HELOCs is variable, meaning the rate will rise or drop with prevailing rates. While this means you may pay a lower rate at times on a HELOC than on a home equity loan, it also means you wont know when your payments might increase. In addition, most HELOCs allow you to pay only the interest on the amount youve borrowed, which means that you must have the discipline to pay more than the minimum required payments in order to pay down the loan.

Tax advantages. Both home equity lines of credit and HELOCs offer a great tax break. The IRS generally allows you to deduct the interest paid for loan amounts up to $100,000, so as long as you itemize, you cant lose here.

Best uses. Because it comes in a lump sum, its usually better to use a home equity loan for one-time expenses, such as a home improvement. Because they have a revolving balance, HELOCs are usually more appropriate for recurring costs, such as ongoing tuition payments. Theyre also great for having just in case of emergency.

THE BOTTOM LINE: Depending on your circumstances, tapping your home equity can be a brilliant financial move or just plain dumb. Before you raid your most important investment, be sure you know the rules.

THE ARMCHAIR MILLIONAIRE WEEKLY SURVEY: Why do you invest in the stock market? Log on to www.armchairmillionaire.com and let us know.

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Lewis Schiff founded the Armchair Millionaire Web site in 1997. His first book, The Armchair Millionaire, was published in 2001. Schiff's newest report, "How to Know When You Are Rich," is now available at www.armchairmillionaire.com.

CONTACT INFORMATION:
Lewis Schiff
Armchair Millionaire
877-833-2823
http://www.armchairmillionaire.com

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