by Nicki Campbell
I was going through some articles I had saved over the years and found this small sidebar from a larger article that appeared in the June 2005 issue of Good Housekeeping. If everyone had read this back then and followed this excellent advice, many people would not be in the financial straits in which they find themselves today and the number of foreclosures might be greatly reduced.
I'm going to reprint the article exactly as it appeared back then. It's worth reading.
Are you borrowing too much?
by Jennifer Wysmuller
If you need money, a home equity loan can make a lot of sense. You tap the value of your home to get a cash infusion and the interest is tax deductible.
But it can be too much of a good thing. Home equity borrowing is at an all-time high, and many people are getting in over their heads, jeopardizing their most valuable asset, says Karen Gross, a law professor who specializes in debt and other related issues. What's more, banks and other financial companies are pushing these loans more than ever -- one bank intends to entice borrowers with free maid or lawn service. Worse, some shady companies allow consumers to borrow as much as 125 percent of their home's value. Here's what you need to know to make sure you don't get stretched too far.
Stick with the tried-and-true formula. Conservative companies won't lend you more than 80 percent of the value of your home. Borrow in excess of that, and you may find that you end up owing more than your home is worth -- a big problem if you have to sell unexpectedly in a down market.
Know your home's worth. Some appraisers hired by lenders may inflate the value of your home. If you have any doubts, hire an independent appraiser, for about $200 to $500.
Watch out for fluctuating interest payments. A home equity line of credit usually comes with a variable rate; if interest rates rise, so will your payment. Before you borrow, be sure to calculate what your highest monthly payment could be.