Home equity borrowing still an attractive option

by Dianne Molvig, Center for Personal Finance editors

SAN FRANCISCO (4/3/06)--Despite recent interest-rate hikes, homeowners looking to borrow money still find home equity loans and lines of credit more attractive than other more expensive forms of consumer credit (Marketwatch.com March 28).

Because home equity lines of credit are variable-rate loans and subject to the Fed's interest rate hikes, interest rates on those lines of credit--around 4% just two years ago--may double by summer, according to Bankrate.com analysts. Still, the interest is much lower than other high-interest debt, and, generally, the interest is tax-deductible on loans up to $100,000.

Since interest rates have spiked upward, cash-out refinancing has fallen off sharply.

If you're thinking of borrowing against your home, consider these tips:

Ask yourself when you'll need the money and how soon you can repay it. If interest rates continue to rise, which they're expected to do, you may be better off taking out a fixed-rate home equity loan.

For incremental expenditures like college, consider a line of credit since you only pay interest on the outstanding balance.

Avoid offers to lend you more than 100% of the equity in your home because interest on the loan above the equity isn't tax-deductible.

Don't take out any loan you can't afford, or sign documents you haven't read.