The recession is over. A Reuters news wire story last week, quoted "an elite economic panel," which pinpointed November/December 2001 as the bottom of the recession. We're on the way up as far as the economy goes – but here's the proviso (and there's always a proviso): We just don't know if we're going to have a "double dip" recession or not.

Nevertheless, if the American Economic Association is right, you can kiss the latest, amazingly low interest rates goodbye in the not too distant future. Have you taken advantage of these rates? For once, my grandkids will get to say – "Boy, if only we had the interest rates that Grandpa had in the early 2000's." With a 30-year, fixed rate loan at 5.75 percent, you could have a monthly payment of $1,167 (principal and interest) on a $200,000 mortgage. Change that interest rate to 7 percent, and your payment jumps to $1,330. That's an increase of 14 percent. If you tack on an additional $200 for taxes and insurance per month, then the difference in these two payments means you would have to make $7,000 more per year to buy the same house.

As the economy improves, the first thing to increase will be the prime rate charged by the Federal Reserve Bank. The prime rate actually affects home equity lines of credit more than it does traditional mortgage rates, which are usually based on the bond market.

Currently, lines of credit are available for about 4 to 5 percent: That's really cheap money. Just because low rates are abounding, however, isn't the reason to go sign up for a line of credit. I am a strong proponent of debt reduction and staying out of debt. However, I'm also a proponent of protecting your financial security with sound debt management. (For an in-depth run down on how home equity lines of credit work, visit the Federal Trade Commission's page on Lines of Credit)

A line of credit, however, is not debt upfront. It's simply a way to access the equity in your home by way of a check book or credit card. CAUTION: One major piece of information homeowners should be aware of is that a line of credit on your home means your house is the collateral for the loan. Unlike a credit card, if you get behind in payments, you could find yourself being foreclosed upon. With that said … A home equity line of credit can obviously provide the funds you need for a home improvement project such as remodeling or upgrading your home. That really goes without saying. However, most homeowners open a line of credit because they need it right now.

Might I suggest opening a line of credit when you don't need it. Get it open and leave it open for emergencies, future debt reduction, or real estate investments, for instance. I've had many an email from consumers who want to make a quick buck by flipping an investment property because they need money right now – when they're sitting on a pile of equity in their current home. The problem is, the reason they need money now is because they are in dire straits financially – lost job, medical emergency, unexpected auto expense, and the list goes on.

Unfortunately, it's when many people need access to their home's equity the most that they can't get access to it. If you lose your job and you're sitting on $50,000 equity, which could float you to your next position, you're not going to be able to gain access to it without sufficient income to pay it back. However, if you already signed up for the LOC months earlier, when your job was stable, then it's there when you need it. (And why not have it set up when interest rates are at record low levels?) Please, keep in mind the spirit in which I'm discussing this type of dipping into your home equity. If you find yourself in financial distress because you have a difficult time managing debt – you may not be the best candidate to dip into your home's equity on top of your already swelling debt load.

Talk with a good loan officer about the pros and cons of a line of credit vs. an actual cash-out refinance to figure which is best for your personal situation.

Published: January 10, 2003

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