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Five Tips For Borrowing Against Your Home

By Staff
Home prices have returned to 2003 levels in some parts of the country, according to data from the National Association of Realtors.

But historically low mortgage rates have many Americans eyeing the equity in their homes as a way to help them get through these challenging times.

If you are considering dipping into your home's equity, either with a home equity loan or line of credit, or a cash out refinancing, here are five things to keep in mind:

1. Do it for the right reasons: It takes a long time to accumulate equity in your home, so be sure to use the money to cover appropriate expenses such as home renovations or college expenses rather than a new Toyota (Stock quote: TM) Prius or an Apple (Stock quote: AAPL) iPhone. "Be prudent and productive with the money," says David Mendels, director of planning for New York City-based Creative Financial Concepts. "If that money is going to burn a hole in your pocket, you're better off leaving it in your home."

2. Take what you can get: If you do need to tap the equity in your home, Mendels suggests taking advantage of today's low interest rates by extracting what you can through a cash-out refinance -- a process by which your new mortgage is larger than the balance on your existing loan, and you pocket the difference as cash. By taking out more than your immediate needs, you'll be more flexible to deal with unforeseen expenses. "I am a big believer in maximizing your financial flexibility," Mendels says. "And cash is a lot more flexible than home equity." However, consider leaving at least 20% equity in your home to ensure that you qualify for the best rates.

3. Interest rates vary: Interest rates are low, but only those with outstanding credit will qualify for the lowest rates. Shop around for the best offers from local lenders by entering your ZIP code at There you can find offers from banks such as JPMorgan Chase (Stock quote: JPM) and Citibank (Stock quote: C) on mortgages and home equity loans and lines of credit. With rates on mortgages averaging much lower than those on home equity loans -- 4.91% on a 30-year mortgage versus 8.99% on a five-year home equity loan, a cash-out refinance might make more financial sense.

4. Think twice about reverse mortgages: For homeowners over the age of 62, a reverse mortgage might seem like a viable option to tap into home equity.  In a reverse mortgage, the home owner borrows against the value of their house without having to pay it back until the house sells. But Mendels warns that the costs of a reverse mortgage can outweigh their benefits, especially considering the low interest rates available today.  For more information on the risks associated with reverse mortgages, click here.

5. Your home is at stake: Loans that allow you to tap your home's equity are cheaper than other forms of debt because your home is acting as collateral for the loan. But, bear in mind that unlike unsecured debt, such as a credit card, your home is on the line if you fall behind on your monthly mortgage or home equity loan payments. That said, be sure to think carefully about whether your home equity offers the best solution to your financial problems, or if there are other, less risky options available.

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