Is Your Home Equity Working for You?
Make a Second Mortgage Your First Defense in Financial Management

Big expenses are a part of life. Some accumulate over time, such as credit card debt; others appear all at once, like the bill for your daughter's wedding. Finding the money to pay for these expenses can be a challenge, but if you're a homeowner your best resource may just be your home.

Home Equity Loans and Lines of Credit - How They Work
Home equity loans and home equity lines of credit - both of which are secured with a second mortgage on the applicant's home - allow you to borrow against the value of your home. Home equity loans are usually distributed in one lump sum, and their rates are fixed for the entire term of the loan. Home equity lines of credit are an available line of credit that, once established, can be accessed at your discretion. Unlike home equity loans, the rates for home equity lines of credit fluctuate based on an index and often convert to fixed rates after a predetermined period of time. Both provide access to up to 100 percent or more of the equity in your home by merely writing a check.

The Tax Advantages
Tapping into the investment in your home with a home equity loan or line of credit has several advantages. The annual interest charges on such loans or credit lines may be fully deductible for those who itemize, an important factor that distinguishes these loans from other forms of consumer credit. In addition, because the collateral for the loan or credit line is your home, their interest rates are significantly lower than for other consumer loans or credit cards.

The Fine Print
As with any loan, there are potential pitfalls associated with home equity loans and lines of credit. When considering this type of loan, remember that your house is the collateral, and failure to repay can cost you your home. Also, think carefully about the items you plan to buy with your loan or credit line. Depending on the equity you have in your home and its market value, your financial institution may make as much as $100,000 available to you. If you'll be tempted to overspend, a home equity loan with a lower, set amount may be better than a flexible line of credit.

Maximizing Your Benefits
If applying for a home equity loan or home equity line of credit appeals to you, do your homework. Interest rates and associated fees can vary significantly, so it always pays to shop around. Identify your needs up front and find the loan that will serve them best so you'll be sure to get the maximum benefit from your valuable home equity.