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COMPARE RATES AND UNDERSTAND RISKS TO MAKE BEST OF HOME-EQUITY LOANS

Most families' financial strength is in the home.

As a house appreciates in value and the mortgage is repaid, equity builds. Home equity can be borrowed against to pay for just about anything - college, medical bills, home improvements and even vacations.Home equity is often used to pay off high-rate credit card balances and other expensive loans.

Used wisely, home equity loans/lines, can be a smart move because they have lower rates than unsecured personal loans and most credit cards. Another advantage is the income tax break. Interest paid on home equity lines and second mortgages of up to $100,000 is fully deductible.

Home equity loans and home equity lines of credit - there is a difference - are popular. But finding the best deal means comparing rates and fees and understanding the risks.

Home equity loans are second mortgages. They can have fixed or adjustable rates, are paid out to the borrower in one lump sum and have a specific repayment term, usually five to 15 years, with equal monthly payments.

Home equity lines of credit are more flexible. They work like most credit cards, except the interest rate changes. Borrowers can draw from the line as needed, repay what they borrow and draw some more. Minimum required monthly payments are a percentage of the balance, usually around 2 percent.

How much you can borrow is based on your home's equity, the difference between its current market value and how much you still owe on the mortgage. If your home is worth $80,000 and you still owe $50,000, your equity is $30,000. Lenders will let you borrow against a percentage of that equity, usually 70 percent to 80 percent, although some will go as high as 90 percent in this market because of steady home values. An 80 percent loan or line on $30,000 in equity would be $24,000.

Most lenders charge an interest rate of 1 percent to 3 percent above the prime rate, which is currently 9 percent. Generally, the longer the payoff term, the higher the rate. Rates can also vary by loan amount.

Most lenders also charge loan-related fees (often $200 to $400) and sometimes points (each point is 1 percent of the loan amount, or $240 on a $24,000 loan) to be paid up front. Borrowers can expect to pay for a property appraisal, title insurance and various processing fees.

Some lenders charge a loan origination fee of 2 percent to 3 percent of the amount borrowed. Some also charge an annual fee and a prepayment penalty.

If you're considering a home equity loan to buy a car, for instance, be sure to include up-front and annual fees and any prepayment penalties in the comparison. You may find a straight auto loan is actually cheaper.

Another tip: Avoid interest-only payment options, advised Hugo Ottolenghi, editorial director of Bank Rate Monitor, a mortgage information firm. You make lower payments, but the interest will eat you alive. And be sure to ask about "caps," or how much a fluctuating rate can change.

Understanding the risks is critical. You are using your house as collateral. Failure to pay puts your home in jeopardy.

Borrowing home equity money to finance a new business or to invest in stocks, mutual funds or some other type of product is probably not worth the risk of losing your home.

The draw-anytime scenario of a revolving line of credit can be disastrous for free spenders.

"As long as they take steps not to get back in debt, it's a good thing to use," said William Russo, a Cleveland financial planner. "Otherwise, you're going to be right back where you started from and you put your home at risk."