Home Equity Loans:
Your Pool is not your only Liquid Asset

by Susan K. Herman

T raditionally, when homeowners needed cash for their child's collegeeducation, home improvements, a wedding, luxury items or medical bills,they refinanced their home. Over the past year, refinancing has slowed dueto a rise in interest rates. In addition, many homeowners do not believethat they have built enough equity to refinance.

There is a way, however, to refinance major expenditures, and even makethem tax deductible. Home equity loans are plentiful in today's marketplace,some can even refinance up to 100% of the value of your home. There areseveral types of equity loans currently available. Just like first mortgages,home equity loan rates can be either fixed or variable. Variable loans usuallyadjust monthly and are based on "prime" plus a percentage, commonly1 - 2% above prime. The fixed equity loans are usually for a 15 year term.Although these rates will be higher than first mortgage rates, using anequity loan for a large expenditure makes sense.

Let's look at an example: Bill and Diane purchased a home in 1993 for$125,000 and financed $100,000 or 80% of the property's value at 7% for30 years. Their son is planning to attend college in the fall, and theyneed the money to put towards his education. If they borrow $25,000 (theremaining value on the home) on a fixed rate equity loan (2nd mortgage)at 12.5%, what affect does this have on their first mortgage interest rate?We can determine the "blended rate" of the first and second mortgageswith a simple formula:

$100,000 at 7% = $7,000 annual interest

$25,000 at 12.5% = $3,125 annual interest

$10,125 = total annual interest

$10,125 divided by $125,000 = 8% blended rate

(interest) (total principal)

The blended rate is still better than todays fixed first mortgage rates.It is certainly better than rates typically charged for consumer creditlines, and unsecured loans. Also, since the interest is probably tax deductible,the savings is greater.

The bottom line is this: a seasoned mortgage profesional can help youdetermine if you have more liquid assets than you think!

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