How to turn your home into a financial survival kit

December 09, 1990|By David W. Myers | David W. Myers,Los Angeles Times

The nation is teetering on the brink of a recession -- if it isn't in one already. Unemployment is up; economic growth is down. Most economists say that the picture will grow even bleaker next year.

Now, then, is a good time for homeowners who are uncertain about their jobs or economic future to do some planning, using the mortgage and the equity in their homes as a financial parachute.

Of course, tapping the equity or restructuring a current loan should be done with careful thought.

"The equity in your home should be one of the last things you touch if you run into financial trouble," cautioned Jack Blankinship, a partner in the Del Mar, Calif.-based financial planning company of Blankinship & Foster.

"But you shouldn't let your equity or your mortgage stand inviolate if you're afraid that you'll lose your job and run out of cash."

Homeowners uncertain about their job security could refinance their loans now or set up a home-equity line of credit before the ax falls: It is a lot easier to get a loan or obtain a large credit line while employed.

Remember, however, that planning to use home equity as a financial "safety net" during hard times can be risky.

"If you buy a washing machine and miss a few payments, the lender can repossess your washer," said John Cahill, a San Francisco-based financial planner. "But if you borrow against your house and miss a few payments, your lender can take away your home."

One relatively conservative way to use the mortgage as a safety net is to set up a home-equity line of credit.

"The idea is to set the line up now in case you need it later," said Lawrence A. Krause, president of a San Franciso-based financial planning concern that bears his name.

"If you fall on hard times, the credit line will ensure that you have instant access to cash."

Since you won't need to tap your credit line right away, it's probably best to look for a lender who won't charge you much to set the line up.

"It wouldn't really make sense to spend a few hundred or a few thousand dollars to set up a credit line that you might not ever use," said Stacy Ann Schramm, a planner with IDS Financial Services in Pasadena, Calif.

"If you do a little shopping around, you should be able to find a lender who'll give you a credit line with little or no up-front charges."

Indeed, many lenders are advertising credit lines that cost nothing to establish.

Remember, though, that just because a lender charges no up-front points or an application fee to set up the home-equity line, there may be fees for property appraisals, processing, credit reports and the like that could amount to hundreds of dollars. So, make sure the lender details all charges before agreeing to take the line out.

Also, make sure that you understand how the loan actually works. Since most credit lines have adjustable rates, it is important to know how often the rate is changed and which index is used to make the periodic adjustments.

If you are low on savings but have lots of equity built up, you could also consider refinancing your mortgage and drawing out enough cash to tide you over if you lose your job.

For example, let's say that your house cost $100,000 about six years ago. Monthly payments on your $80,000, 11 percent fixed-rate loanare $762.

If you refinanced your home for $100,000 at the going rate of 10 percent, your new monthly payment would be $878.

Although your new payment would be $116 a month higher, you could offset the difference by taking the "extra" $20,000 you had left over and putting it in a money market account paying 8 percent interest.

In addition, you could dip into the $20,000 to make your monthly payments for up to two years if you found yourself out of work for an unusually long period of time.

If your chief goal is to lower your monthly payment, you could consider refinancing your current loan with an adjustable-rate mortgage that carries a low introductory rate.

For example, say you have an 11 percent, fixed-rate loan with an outstanding balance of $120,000. Your monthly payments are about $1,145.

If you refinanced your mortgage with an ARM that will have an 8 percent rate for the first year, your monthly payments would drop to about $881.

"By the time your interest rate (on the new ARM) adjusted to market levels a year or so from now, you'll probably have a new job and will be back on your feet again," said Lewis Wallensky, a financial planner who owns his own firm in Los Angeles.

In fact, Mr. Wallensky said, you might even be able to refinance your mortgage with an ARM, draw out $20,000 or more in cash, and still lower your monthly payments for the next year or two.

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