by Roshan Richards

Created on: September 18, 2008   Last Updated: October 21, 2008

Riding Out the Storm

The economic news as of late has been more than dismal, it has put the "ug" in ugly. With house prices taking a kick to the shins, it is no wonder so many people are taking a "wait and see" approach before refinancing or purchasing a home. Unfortunately, that approach, which smacks of a deer caught in headlights, can be potentially damaging to one's overall financial survivability. The good news is if you have equity in your home, you also have the capability to ride out the storm.

"What?! Refinance my home in this market?" you say. Yes. Let me tell you why. First, equity is not really your equity until you pay a lender for the privilege of accessing it. Second, equity is unutilized money that can go a long way to eliminate "bad" debt (like credit cards), and sometimes with tax benefits to boot. Third, there are many conservative ways to access equity now without putting you in hock later. Following are a few.

Most lenders lend up to 90% LTV. That means if you own a house with a market value of $250,000, then 90% is $225,000. If you only owe $198,000 on your mortgage, you have $27,000 just sitting around doing nothing. Now take a look at your other debts: credit cards, car loans, the money you owe Uncle Frank. You are making a monthly payment on these debts, usually at higher interest rates and montly payments, and with no potential tax benefits. When you refinance your home, you utilize that equity to pay down or pay off those debts, thus freeing up money through lower monthly payments AND you still have at least a 10% equity cushion left in your home.

Here is an example: (John has three debts)

CC #1 Balance: $5400 Monthly Payment: $108
CC #2 Balance: $400 Monthly Payment: $25
Car Loan Balance: $20,450 Monthly Payment: $365
Totals: $26,250 $495

Side Note: Only refinance your 1st mortgage if you are getting a much better rate than what you currently have. If not, the cost may outweigh the benefits. There are many lenders who will do a Home Equity Line of Credit (HELOC) for you at little or NO COST. A line of credit is put on your home that is tied only to its equity portion up to the 90% LTV, for our example: $27,000. It usually has a variable rate. Now don't panic because I said "variable." Unlike a traditional loan, you do not have to take the full amount at once; only what you need, thus only paying interest on the portion that you have used. Also, as you pay down additional principle, your payment changes accordingly. This greatly offsets

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