MANAGING YOUR MONEY / Earning More, Keeping More : SAFETY NET : <i> Homeowners are using their equity to see them through tough times. Experts say such moves must be thought through carefully.</i>
When Linda Morgan of San Diego thought she might soon be laid off from her job as an assistant manager at a furniture store, she quickly set up a $10,000 line of credit based on the equity in her home, to help her make ends meet if she was thrown out of work.
“Fortunately, I haven’t had to use it yet,” said Morgan, who so far has kept her job while three of her co-workers have lost theirs. “But I sleep better at night knowing that I have something to fall back on if my paychecks stop coming in.”
Throughout California, homeowners who are nervous about their finances are using their mortgages and built-up equity to fashion a personal financial safety net to catch them if they fall on hard times.
Of course, using equity to bail you out of a financial jam isn’t something you should take lightly: Many financial planners say you should first sell any stocks, bonds or other liquid assets you own before you turn to your house for help.
And even if you decide to use your home as a source of financial first aid, the way you use it will depend largely on how badly you need the money.
The easiest and safest way to use equity is to simply refinance your existing loan. With mortgage rates at 7% for the first time since 1968, lopping several hundred dollars a month off your payment is a good move regardless of whether your job is secure or you’re worried about joining the ranks of the unemployed.
“But if you really think that your job might be in jeopardy, you should probably refinance now because you won’t be able to refi if you get thrown out of work,” said Morrie W. Reiff, a financial planner at Planned Asset Management in Encino. “Your chances of getting a loan are obviously a lot better if you’re working than if you’re unemployed.”
Some equity-rich homeowners who are worried about their jobs are refinancing at today’s lower rates and pulling out an extra $20,000 to tide them over if they lose their jobs, Reiff said.
But while many borrowers are choosing 15-year pay-back schedules so they’ll own their homes free and clear in half the usual time, others are opting for a 30-year term so their payments will be as low as possible--and easier to meet--if they eventually lose their jobs.
Another conservative way to use your mortgage as a safety net is to set up a home equity line of credit, as homeowner Morgan did. Although she doesn’t need the credit now, she figures it’ll come in handy if she gets laid off because she doesn’t have much savings.
“Take an especially good look at the ‘no-points, no-fees’ credit lines that don’t cost anything to establish,” Reiff suggests. “There’s no reason to spend a lot of money to set up a credit line that you might not have to use.”
Refinancing or setting up a credit line might not be an option if you have already lost your job, because most lenders are understandably wary of lending money to people who don’t have any verifiable means of paying it back.
Still, your current lender can be a valuable ally if it will offer you some other type of relief.
“Most financial institutions understand how tough things are today, and they’re usually willing to help out their borrowers who need it,” said Eileen Fitzpatrick of the Federal Home Loan Mortgage Corp. in Washington.
“Just make sure you call your lender as soon as you run into trouble,” Fitzpatrick says. “Don’t wait until you start missing payments or get a foreclosure notice before you call for help.”
Loan relief can come in a variety of forms. If you’re simply short a few hundred dollars a month, the lender might temporarily lower your interest rate to cut your monthly bill.
Other lenders will allow troubled borrowers to make “interest-only” payments until they get back on their feet, Fitzpatrick said, and some will even agree to suspend payments until a new job is found.
If your current lender flatly refuses to help, you might tap your equity by going to a financial institution that specializes in making home equity loans. Although these lenders typically offer the most flexible repayment schedules and loose credit requirements, many also charge high interest rates and exorbitant set-up fees.
Experts say it’s sometimes best to eschew those loans because of their high fees and simply sell the home. But with the housing market still flat, you’ll have to make sure the house is priced competitively if you want to sell it fast.
“Ask your realtor for a list of what similar homes in the neighborhood have actually sold for over the past two or three months, and then set your own price at the same level or a little below it,” said Kenneth Lowman, an agent at ERA Dahler Realty in Rancho Cucamonga. “If you set your asking price too high, your house is just going to sit on the market for months.”
If you purchased your house since the market peaked around 1990, there’s a good chance you’ll have to sell it at a loss. Making matters worse, the Internal Revenue Service won’t let you deduct those losses from your tax return, said David Mellem, an accountant and research manager at the National Assn. of Tax Practitioners in Wisconsin.
As an alternative, consider renting out your home and moving to a less-expensive apartment.
“You could always move back into your house when you get back on your feet, or you could sell the place for a profit after the market finally turns around,” Mellem said. And if you sell the house while it’s a rental property instead of your personal residence, you might be able to deduct your losses.
Although converting your home into a rental might make sense, don’t do it if the rent you’ll collect won’t cover your mortgage payment or if you’re not willing to manage the property yourself.
YOUR HOUSE: A FINANCIAL SHELTER
If you’re a homeowner who’s stuck in a financial bind, there are a variety of ways you can use your house to help you make ends meet.
* Consider refinancing your current mortgage. Even if you refinanced within the last year or two, it might pay to refinance again, because rates recently dropped below 7% for the first time in 25 years. Slashing your rate or simply stringing your debt out over a new 30-year term will reduce your monthly housing expenses.
* Set up a home equity credit line. Many lenders offer no-points, no-fee lines that can be tapped if you suddenly find yourself short of cash. But don’t fall for glitzy marketing campaigns that encourage you to spend the money on luxuries: Use the line only if you need it to meet necessary expenses.
* Ask your lender for help if you’re in financial trouble. Banks and savings and loans know that some borrowers are hurting, and many are willing to provide short-term loan relief.
* Consider selling your home and moving to cheaper quarters. Renting the property until you get back on your feet is an alternative, as long as the rent you collect will cover your monthly mortgage payment and you’re willing to assume the risks and duties of a landlord.
