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Protecting the Money You've Made

When your home's value doubles, you need to be twice as smart. The tremendous rise in real-estate prices over the past few years has left a lot of people sitting on their own private gold mines. It can make sense to spend some of those home-equity gains to:
  • Finance major repairs. Or pay for upgrades that you absolutely need. That's a new roof or another bedroom for your expanding family—forget about the vacation in Bora-Bora and the fancy Mercedes you can't afford to buy outright. But keep in mind that even something that adds value to your house, say, a gorgeous gourmet kitchen, can put you at financial risk if the market tanks and your gold mine vanishes into thin air.
  • Take advantage of the tax code. If you've been thinking about selling the place where you've lived for two of the past five years, don't wait for prices to rise even more—greed is definitely not good. Right now, any profit up to $250,000 for single owners and $500,000 for couples is tax-free; then the rate rises to just 15 percent. If Congress doesn't vote to extend the capital-gains rules, the deal might not be as sweet after 2008.
  • Go down a size. If you're entering the empty-nest years, consider cashing in and moving somewhere smaller. You could potentially find a place to buy with cash or only a small mortgage. Then, safely invest the leftover money, and your house has just funded your retirement.
Unfortunately, the real-estate boom has tempted many owners to treat their house like a checking account, and that can be dangerous.

You should never turn to your home equity to:
  • Pay off credit cards. While I certainly hope you always live up to your financial responsibilities, it doesn't make sense to use a secured loan to pay off an unsecured one. Translation: If you fall behind on credit-card bills, there's usually no collateral that the card company can seize or require you to sell. Home-equity lenders could force you to do just that if you stop making payments.
  • Underwrite higher education. If you fall behind on a home loan used to pay for college, you could end up with a well-educated kid but no roof over your heads. What's smart about that? Student and parent loans are a better move.
Before You Buy | Take an Interest in Rates

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