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A home equity line can bail out the unemployed

You can tap your home's equity to pay the bills if you are laid off. But you have to take action while you still have a job.

There are two ways to extract equity from your home without selling it or refinancing the mortgage. One way is to get a home-equity loan -- a lump sum that you repay over a specified period. The other way is to get a home equity line of credit, which behaves like a credit card with a revolving balance. You draw against it when you want, like using a credit card, and as you repay the balance, the credit becomes available again.

 

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Traditionally, home equity lines of credit, or HELOCs, have been used to pay for periodic expenses such as multistage house renovations or college tuition. A line of credit can be a sound way of meeting normal living expenses, too, during a time of unemployment.

A lot of people are discovering the pain of unemployment. Nearly 338,000 people filed jobless claims the first week in April. The national unemployment rate was 5.2 percent in March, and 8.2 percent in the District of Columbia, which had the highest jobless rate.

Many unemployed people dip into their savings, says Anthony Hsieh, president of HomeLoanCenter.com. "But if you don't have a cash savings account, you can draw from your home's equity, which is a form of savings," he says.

Don't wait for the worst
In unemployment, as in comedy, timing is critical. As Hsieh notes, credit is easily available when you don't need it and hard to get and expensive when you need it.

That means that the time to get an equity line of credit is before you lose your job, not afterward.

"You're not going to qualify if you don't have a job," Hsieh says. If you wait until you're unemployed to borrow against your home's equity, you will have to apply with high-rate subprime lenders. Most equity lines of credit don't have closing costs. People with good credit often can get an equity line of credit for the prime rate or a little higher. Right now, the prime rate is 5.75 percent.

You might get queasy at the thought of getting deeper into debt while unemployed. Certainly, it's something to avoid if you can. Sometimes you can't.

For those who worry about their job security, getting a HELOC "is a very smart move," says Kay Shirley, a certified financial planner, "because if they get in a bind and they absolutely need money while they're looking for a job, it is so much better to put it on a low-interest line of credit on their home than on a high-interest credit card."

That choice -- between a HELOC and a credit card -- is faced by many unemployed people, says Shirley, who is president of Financial Development Corp./Mutual Service Corp. in Atlanta.

Of course, "they have to be careful not to abuse that line of credit because they run the risk of losing their home," Shirley adds. "It should not be seen as a source of funds to tap for items that you want to have. It should be seen for items that you need to have."

In other words, no dining out, no vacations.

Shirley says borrowing against home equity while unemployed should never be the first resort. She says the first resort is savings. Then she corrects herself and says the first resort is to find a job -- any job. Then she corrects herself again: "The first thing to do is cut expenses," she says -- raise the house thermostat in the summer, cancel cable, dump the cell phone, mow the lawn yourself instead of hiring someone to do it.

That makes borrowing against home equity the fourth resort.

Deducting the interest
Another benefit to borrowing against one's equity is that, in many cases, the interest is deductible from federal income taxes. But it's not always deductible, and the rules can get tricky.

"I would encourage people to check with their tax professionals if they are planning to use home equity to get by," says Gregg Wind, a certified public accountant in Marina del Rey, Calif.

Generally speaking, the interest on up to $100,000 of home equity debt is deductible, no matter how you use it. But you might be able to deduct interest on an even higher amount of equity debt if you use it for specific purposes, such as for home improvements.

Most equity lines don't exceed $100,000, "so the lenders probably are mindful of the government's limits," Wind says.

 

 
-- Updated: April 18, 2005:
   

 

 
 

 

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Home Equity
Compare today's rates
NATIONAL OVERNIGHT AVERAGES
$30K HELOC 4.67%
$50K HELOC 4.04%
$30K Home equity loan 5.00%
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