Home Is Where the Loan Is

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Need a loan? Check beneath the couch cushions for some spare change.

We're only half-joking. It turns out that for a growing number of consumers, home is where the loan is -- meaning that folks are borrowing money against the equity in their house to pay for things like college, cars, home repairs, and even unexpected medical bills. Industry experts estimate that 80% of homeowners are eligible to take a home equity loan (or home equity line of credit -- HELOC).

Evidently, many are taking the industry up on its offer. By the end of this year, nearly 25% of 800 homeowners recently surveyed by LendingTree will have secured a home equity loan. That's double the number of homeowners who did in 2003.

So where's the money going? More than 38% of borrowers will use the loan for home improvements, according to LendingTree's findings. Debt consolidation was cited by about 32%, new-home purchase by 4.6%, car buying by 4.3%, and college tuition and small-business expenses each were reasons cited by less than 3% of borrowers.

Before you borrow money from your abode, however, consider how a HELOC really works. Many people think HELOCs are like traditional mortgages, since they're tied to their home. But there are many ways in which they're different. For starters, a mortgage is for a set amount of money, whereas a HELOC is a line of credit against which you can draw, up to a set amount. Also, HELOCs tend to be cheaper to set up than mortgages.

Instead, think of a HELOC like you would an adjustable-rate mortgage (ARM). (We talk more about ARMs here.) Standard ARMs are designed to maintain a fixed rate for one or more years, after which increases are generally limited by formulas and caps. The big difference between a HELOC and an ARM is that your home equity loan interest rates will fluctuate frequently.

Jack Guttentag, the "Mortgage Professor" at mtgprofessor.com, offers this HELOC warning: "Don't compare the APR on a HELOC with the APR on a standard loan because they mean different things. The APR on a HELOC is the interest rate, period. Among other things, it does not reflect points or other up-front costs, as the APR on standard loans does. Requiring lenders to show the interest rate on a HELOC twice is a strange way to protect borrowers, but there it is." Guttentag goes on to offer several tips on shopping for a HELOC.

If you're interested in mortgages or HELOCs, our Home Center can lend a hand and our Rates Center shows HELOC rates across the country.

And drop by our Buying or Selling a Home discussion board, where folks are happy to answer your questions (you can always take a 30-day free trial first).