Home Equity Loans And Lines Of Credit

If refinancing doesn't make sense, you have two options to consider next: home-equity loans, which are made in a
lump sum and have a fixed interest rate; and home-equity lines of credit, also known as HELOCs, which you can draw
on in small chunks over a period of time and have variable interest rates. Both have repayment terms of anywhere
from five to 20 years, and the interest on at least the first $100,000 can be deducted from your taxes
(unless you get hit by the alternative minimum tax, in which case the interest is deductible only if the loan goes
toward home improvements). And compared with first mortgages, both are easy and inexpensive to set up:
Home-equity loans cost about $200, while lines of credit can sometimes be had with no up-front fee. HELOCs feature especially attractive rates: 4.5% on average, compared with 7.25% for a 10-year fixed loan.

Home renovations are the most common use for these loans. Richard and Linda Krieger, for example,
of Oak Park, Mich., took out a $50,000 line of credit to redo their kitchen last year. "It started with new furniture in the family room, and it looked so good we decided to do the kitchen too," says Linda. "I was tired of looking at those same lousy cabinets in the kitchen after 31 years." The Kriegers used just $25,000 for remodeling. And though the current minimum payment is only $77 a month, they've wisely been paying as much as $700 a month with a goal of retiring the loan early.

Many Americans use their home equity to jump-start business ventures. We wouldn't recommend that
everyone bet their primary residence on the success of a small business. But for Miami residents Jen and
Dinorah Yavitz, 32 and 40, it looked like a worthwhile gamble. Last fall Jen, who has run a drug-and-alcohol
testing service out of his home for the past seven years, decided to buy and renovate a nearby building and
use part of the extra space to expand his business. Rather than taking out a commercial loan at 12% interest,
he went with a $100,000 line of credit on his primary residence at 4.5%, which currently costs him $377 a month.

Once the renovation is complete, Jen plans to rent out half the space for three times the amount of his HELOC
payments--and he figures it makes sense to keep the payments as low as possible until the renovation is done and the business is running. "I wouldn't be able to rent an office space for under $400 a month," he notes.

Another clever use of these loans applies to those who have three years or less left on their primary mortgage.
If you haven't refinanced because the $2,000-plus cost outweighs the savings you'd recoup in just a few years,
you may want to pay off your mortgage with a line of credit. You'll essentially be getting a very cheap, short-term.