CAPITALIZING ON THE EQUITY YOU HAVE IN YOUR HOME

If you own a single family home in Santa Monica, lucky you. Chances are your home increased in value by as much as 23% in 2002. Now that your property is worth far more than what you paid for it, you’re sitting on tens of thousands of dollars in profits. If you’d like to make the equity in your home work for you, there are several ways to reinvest your new-found wealth that will allow you to get the most out of your home, regardless of what happens to the housing market.

You know that gourmet kitchen you’ve always wanted, now may be a great time to build it. To pay for your remodel, take out a home equity line of credit (HELOC); this loan allows you to borrow money against the equity in your home. With a HELOC you take money as you need it and only pay interest on the amount you've taken. FYI – at the start of 2003, some HELOCs were as low as the prime lending rate of 4.25 percent (rates vary). Now, according to Realtor magazine, when you go to sell your home, that gourmet kitchen can have as much as 165% return on investment.

“Today is a great time for home improvements because the cost of borrowing is the lowest it’s been in 42 years,” confirmed Jay Penso, mortgage expert with United Pacific Mortgage. “Since home improvements will bring that kind of yield, a home equity loan is a very wise investment.”

If  you’re a recent buyer and  plan to move long before you pay off the mortgage, think twice before financing a renovation that may make your home the priciest on your block. For resale purposes, "Be careful you don't over-improve for the neighborhood.... It’s best to be the least expensive house in an expensive area," stated certified financial planner Barbara Steinmetz.

Do you have outstanding debt? The interest rates you’re paying on credit cards or loans may be considerably higher than the interest you’d pay on a by refinancing your home or taking an equity line of credit. Other pluses – you may get a tax deduction on the interest, and if you consolidate your debt you’ll be in a better position for your next home purchase. The downside of this decision is if you default on your payments, you may be putting your home at risk.

Another option is to tap into the equity of your home to diversify your investments or increase your cash flow. After you’ve paid down your mortgage significantly, the equity you have in your home may be a major piece of your financial portfolio. If you own your Santa Monica home outright, you can take out something along the lines of a $100,000 30-year mortgage at 6.25% and use the money to invest in dividend-paying stocks with solid track records. Solid investments, like many Real Estate Investment Trusts can have an average yield of 7.5%-8.5% (rates vary). After taxes, that should still generate more income than you pay in mortgage interest.

“You can borrow at the prime lending rate far below any type of alternative financing,” stated Penso. “And keep in mind that it is tax deductable - depending upon the income bracket you’re in - you can write off between 30 and 40 percent of the accrued interest.”