There's No Place Like Home, Except for Loans

(MONEY Magazine) -- Not long ago, a well-known economist surprised me by suggesting that it's a good time for homeowners to tap their equity to buy stocks.

Crazy, I thought. If you had risked your house to invest in the stock market before the dotcom crash, you could have lost everything.

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But his idea got me thinking. For many of us, our house is our biggest cash reserve, and raiding that piggy bank made financial sense for years because interest rates were low and rising home prices kept replenishing the bank.

Now, with rates up and prices soft, is there any reason to tap your home equity?

Opening a home-equity line of credit is no longer a slam dunk for three reasons.

It's not cheap money Even though rates may drop in 2007, in recent years they've been going up, up, up. At today's average rate of 8.7%, the interest-only monthly payment on a $100,000 HELOC is $725 vs. $387 when rates hit their lows nearly three years ago.

You could owe more than you own Lenders have made it possible to borrow 100% of your home's value. During the housing boom, for instance, many buyers who were stretching to afford a home financed the down payment with a HELOC. Do that today and if prices fall, your home loans could add up to more than your house is worth. If you have to sell (and pay a realtor 6% or so), the difference will come from your wallet.

The market may not bail you out Throughout the boom, homeowners financed lavish upgrades with HELOCs, confident that the run-up in their home value would outstrip the cost of construction. Without that tailwind, you can't be sure you'll recoup everything you put into your home. You're paying nearly 9% to make an investment that's no sure thing.

Despite all of this, you may still want to tap your equity - it's easy, and interest on as much as $100,000 in debt is typically tax deductible. Just be careful.

Make it the right reason That includes doing wise renovations, especially if you plan to stay put indefinitely, but not such extensive ones that you own the biggest house on the block.

Don't be pressured Ignore a lender or mortgage broker's argument that by waiting to take out a loan or line of credit, you won't be able to borrow as much. Sure, if your home's value is lower, your maximum loan will be smaller, but that's not necessarily a bad thing.

Shop smart You can eliminate rate worries by locking in a fixed payment instead. Rates on old-fashioned home-equity loans are actually lower than HELOC rates today - 8.1% on average. If you prefer the flexibility of a HELOC, take advantage of all the competition among mortgage lenders and check the Web for deals in your area (Bankrate.com and HSH.com are good sources). By opening a checking account or getting the payments automatically debited from your account, for example, you can lower your rate by a half to a full percentage point.