A Financial Guide to Buying a Home

Rule #4

Protect Yourself With a Home-Equity Line of Credit

Keate Barker

Old-Think: Wait until there is an emergency and you really need the cash before you apply to a bank for money.

New-Think: The best time to safeguard your finances by securing a line of credit is when you've just bought a new house. Todd Shepherd, a financial adviser and certified public accountant in Leawood, KS, signed up for a home-equity line of credit -- even though he hopes to never use it -- as soon as he was ready to move into his new house with his wife, Vicki, and their 9-month-old baby, Jake.

A home-equity line of credit is based on how much equity exists in your home on top of your mortgage. For example, if your home's value is $200,000 and your mortgage is $125,000, a bank might allow you to borrow another $35,000 through a home-equity line of credit. Your total home borrowings would add up to $160,000, or 80% of the house's value; the interest you would pay on the $35,000 would be tax-deductible, just like mortgage interest. But -- and this is the best part -- because it's a credit line and not a loan, you don't take the money from the bank unless you need it. It's an emergency line of defense.

There are three simple reasons why this strategy is smart for home buyers. First, it's easy: If you apply at the same time or soon after you qualify for a mortgage, you'll minimize paperwork and may be able to reduce or eliminate fees. Second, it's painless: If you don't use the credit, there's minimal impact on your family's credit rating. (Make sure you don't apply for a home-equity loan, which is a different matter.) Third, it's far safer to have this credit line than not.

"I'm in California, where the layoffs have been huge," says Freiburger. "You need to be prepared for an emergency, whether it's a job loss, a disability, or an aging parent's illness. That's why I tell people to sign up for a home-equity line of credit as soon as they buy a home."