Is Now a Good Time for a HELOC?

Even though home values have dropped across the country, unemployment is extraordinarily high, and consumers in general are heavily in debt, many people have a need for more credit.

If you're in a position to borrow, consider a loan based on your home equity--the difference between what your house is worth and what you still owe on your mortgage. You could take on a conventional second mortgage or you could enter into a revolving credit agreement with no set term, known as a home equity line of credit (HELOC).

A HELOC works almost like a credit card to enable you to convert some of the value of your homeownership into cash. Interest rates for HELOCs usually are much lower than regular credit card rates, especially if you have more than a 20% ownership stake in your house. At this time, HELOC rates are favorable, down to the 5% range in some parts of the country (bankrate.com Dec. 15). Credit unions offering this kind of loan usually have better rates than other lenders.

As an added bonus, the interest expense for some uses of HELOC funds is tax deductible. But be careful. Just as with your first mortgage, you'll have to pledge your house as collateral on a HELOC. You don't want to increase your risk of losing your home unless the added debt is worth it and you have stable employment. Here's some advice from the Credit Union National Association (CUNA) Center for Personal Finance about using a HELOC wisely:

• Put additional debt to good use. Using a HELOC for prudent home improvements such as a new roof, or for education, or to consolidate more expensive loans can significantly improve your net worth. In contrast, borrowing for vacation or daily expenses or to build a home theater can jeopardize your long-term financial health.
• Avoid going all in on a HELOC. Lenders aren't likely to advance a line of credit equal to 100% of your home's equity, but beware of the temptation to indulge too deeply. Remember that home equity can represent a great deal of your future retirement nest egg's value.
• Manage your HELOC use. Make all payments for loans and other obligations such as utility bills on time to maintain a clean credit report and solid credit score. Keep your total monthly debt payments, excluding a first mortgage and credit card balances, paid off monthly, to no more than a 20% of your take-home pay. Watch the economy--as it gets stronger, interest rates in general will rise, pulling your HELOC's variable rate up as well.