When, How To Top Your Equity

by Broderick Perkins DeadlineNews.Com If you plan to tap your equity and get a second mortgage to see you through hard times, tap your equity before hard times actually hit. Lenders aren't likely to give you additional credit if you are jobless. However, if you are on a pink slip list and borrow anyway you could compound your financial troubles. "It is my sad duty to inform you that one of the basic rules of fraud investigation and prosecution deals with 'intent.' If you knew that you were being laid off and procured a home equity loan, then you may have knowingly committed an act known as 'intent to defraud' when you provided your verification of employment information and signed the loan application," says Stephen Richard Levine, with Franzel Mortgage Consultants in Westlake Village, CA. "On the other hand, you could argue that you were prudently tapping a source of frozen funds (your equity) to prepare for a financial emergency," said Levine. With the soft economy and slow job growth, banking on your home isn't a bad idea, provided you get the right equity loan at the right time -- just in case. There are three common ways to tap your home equity. HELOC -- A home equity line of credit (HELOC), is a revolving credit line that acts much like a credit card, but without the higher interest rate. Up front, HELOC's don't cost you any more than minimal application fees and interest doesn't kick in until you actually use the money. As you repay the balance the credit becomes available again. Equity Loan -- An equity loan is a second mortgage for a fixed amount. The installment loan forces you to begin making payments right away, even if you don't use the money right away. Rates are slightly higher than HELOC rates, but tend to be fixed rates. Cash Out -- You can also tap your equity when you refinance with a cash-out refinance that increases the balance of your first mortgage but, if the new interest rate and your new loan balance are low enough, you could still have a smaller monthly payment -- and only one monthly mortgage payment. Some experts advise never using your equity, but to pay off your mortgage by retirement time so you can live "rent free" when your income is reduced and fixed. Most financial and investment experts advise you to only use equity for capital improvements and investments that provide an equal or better return on your money than the cost of the loan. Certain home improvements, education for the kids and new business financing are relatively better uses of equity than say buying cars and boats, debt consolidation and vacations. An exception to all the rules is to use your equity for emergencies and unforeseen events that might reduce your income or place added demands on your wages, births, deaths, illness, injuries and job loss. "I've always thought that to have an equity line available is good planning for whatever emergencies arise. Getting laid off is one of those emergencies," said Joelyn Carr Fingerle a certified public accountant from Fremont, CA. "The ethical issues are important. You cannot 'fudge' the application. I guess the issue for me is also preplanning and anticipating the future, not living beyond your income, but instead getting the six months living costs into ready savings and CDs so that emergencies can be handled," without tapping your equity, Fingerle added. For those who've been unable to put aside that six-month emergency fund the inability to save could be a red flag warning you about your ability to repay a loan. If you do go the equity borrowing route it's crucial to consider how you'll repay it -- not to mention your mortgage and any other bills -- especially if you are unemployed. "If there is a high probability that your setback is temporary, you take the loan to keep your first mortgage current, and you pay it back when you get on your feet," said Jack Guttentag, publisher of the "Mortgage Professor" consumer Web site in Wayne, PA. "If the setback is going to be permanent, it is foolish to use up your equity by taking a HELOC. Instead, you sell the house and preserve the equity, as well as your credit rating," he added. Copyright © 2004 DeadlineNews.Com -- Broderick Perkins, is executive editor of San Jose, CA-based DeadlineNews.Com, an editorial content and consulting firm. Perkins has been a consumer and real estate journalist for more than 25 years.