Released: November 16, 2006

Tips for pulling cash from your home

Source: Gerri Willis, CNNMoney

Not long ago, a well-known economist surprised me by suggesting that it’s a good time for homeowners to tap their equity to buy stocks.Crazy, I thought. If you had risked your house to invest in the stock market before the dotcom crash, you could have lost everything.

But his idea got me thinking. For many of us, our house is our biggest cash reserve, and raiding that piggy bank made financial sense for years because interest rates were low and rising home prices kept replenishing the bank. Now, with rates up and prices soft, is there any reason to tap your home equity?

What’s changed

Opening a home-equity line of credit is no longer a slam dunk for three reasons.

It’s not cheap money Even though rates may drop in 2007, in recent years they’ve been going up, up, up. At today’s average rate of 8.7%, the interest-only monthly payment on a $100,000 HELOC is $725 vs. $387 when rates hit their lows nearly three years ago.

You could owe more than you own Lenders have made it possible to borrow 100% of your home’s value. During the housing boom, for instance, many buyers who were stretching to afford a home financed the down payment with a HELOC. Do that today and if prices fall, your home loans could add up to more than your house is worth. If you have to sell (and pay a realtor 6% or so), the difference will come from your wallet.

The market may not bail you out Throughout the boom, homeowners financed lavish upgrades with HELOCs, confident that the run-up in their home value would outstrip the cost of construction.

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