The equity accumulated in a home can be a convenient source of income, particularly for homeowners who have paid off their mortgages. Before accessing that value, however, it's important to analyze one's particular financial situation and evaluate various equity tapping options.

According to recent Census Bureau statistics, as many as three out of 10 people who own a home have no mortgage. Although most of those homeowners who enjoy the luxury of a mortgage-free home are already retired, many people who are still working and earning a regular income also live in homes that carry no debt. Regardless of the particular demographic, anyone who has lots of equity in a home, or a totally mortgage-free house, will want to explore various options for converting that real estate value into spendable monthly income.

Reversing the trend

The most popular means of tapping equity is the reverse mortgage. Because of the unprecedented number of baby boomers who are now old enough to use this kind of loan, the reverse mortgage is experiencing a huge surge in popularity. Here's how these unique loans work: basically, the lender makes payments to the homeowner in exchange for a stake in the real estate. After the homeowner moves or dies, the mortgage company becomes the owner of the house. But, depending upon one's financial situation and age, a reverse mortgage may not be available or may be inappropriate.

Leaning on the home equity loan

Another option is a home equity line of credit (HELOC), which may be used like a checking account or credit card to pay expenses. There are limitations on how much equity you can borrow against, and some HELOC loans offer fewer legal federal and state consumer protections. Due to the current mortgage crisis, many banks have either discontinued their HELOC programs, or have cut back on the amount of credit they extend to customers. As a result, it's getting harder to fully capture one's equity value through this kind of product.

Refinancing for cash

You can also tap equity through a refinance, which is essentially taking a mortgage out on your mortgage-free home. This pays if mortgage rates are low, and the homeowner needs a large amount of cash for a home renovation, a child's education, or to pay for medical expenses.

Many financial planners advise against paying off one's mortgage completely, because carrying mortgage debt offers special tax advantages. Interest paid on a mortgage loan, for example, is usually tax deductible and can be a strong incentive to maintain at least a small outstanding principal balance.

It's also possible to sell, downsize into a paid-off home, and invest the leftover profits. Those who do that should write themselves a monthly check equal to what their mortgage payment would be if they still had one, and sock away the funds for added savings or investment portfolio growth.

Not having a mortgage offers peace of mind. But if you are strapped for cash, looking to take some out of your home may be a low-interest solution.

Published on February 15, 2007