The second form is riskier from my point of view but maybe not from yours. You may be in an investment, business, or group that is doing well and welcomes more capital to continue the growth. I can’t tell you whether it is a good risk or not, but if you are comfortable with the scenario, then borrowing from your house at historically low interest rates may be the answer to your financial future. Remember, gambling and speculating are not the same as investing and if you don’t understand the nuances, you are risking both your money and your house.

Securing a long-term, low-cost future is the next best thing you can do with low interest rates. The way to do this is with a long-term, 25 or 30-year loan at rates from the high 4% range to the low 5% range. This will take you right through the credit crunch without a care in the world because you have a fixed rate that is manageable now and in the future. The problem with this approach, and what moved most borrowers into the third strategy, is their failure to plan for the future. When rates came down, everyone raced to refinance and lock in a low, long-term rate. Few took the time to consider future needs.

The easy solution was a low interest HELOC, home equity line of credit. After all, they were also in the 4% range. The difference was that they were a variable and as interest rates went up so did the interest and the payment. Not to worry; there were also low-interest credit cards to take care of the problems that came forth. In the short run that worked; in the long run, the cards’ interest rates also went up. Now the dilemma: borrowers had great low-interest first mortgages but higher and higher debt being financed by HELOCs and credit cards. They were reluctant to give up their 4% and low 5% mortgages even though their blended interest rate was in the 6% or 7% range. (Blended rate is the total of all debt divided into the total interest you paid on this debt.) Eventually they were forced to see the light and give up their long-term, low-interest rate for one that was less than their blended rate. This meant they had a short-term, low-cost experience, not a long-term one.

To avoid that ever happening again, you must anticipate your needs and set up reserves. (Reserves are monies set aside for future expenditures that were not apparent at the time you took the money out of your house.) At this point, you are may be worried that if you pull out the money out of your house and it goes down in value, you would owe more than it is worth. My belief is that if you don’t pull out the money and your house went down to a point that at best you are even, that you wouldn’t have the money when you need it. Reserves buy you time for corrections in the market and in your own financial situation. Without them, you are at risk.

And now for the infamous number 10: taking low, short-term interest rates and expanding your standard of living based on these payments. Who would do something like that? For starters all the people who took the 1% option ARM and are now saying they didn’t understand it. I am not making any comment except that those who made the mistake are much wiser, if not poorer, at this point. The idea is to never look at that type of strategy again. Also realize that it wasn’t the loan that was the problem but how you used it. I have had several clients who have used the option ARM and made it work. Its best application is by borrowers who use their money to make money and therefore need the lowest possible payment all year long. At the end of the year, they write a check for the deferred interest and the increased loan balance goes right back to where it began the year, without a trace of negative amortization. The reason: they end up paying all the interest on the loan so nothing is added to the balance for the long term. That takes discipline and sufficient good fortune on investments.

Others who can use the option ARM successfully: those with over $1 million of equity in their houses and limited income. They use the negative amortization (the amount of interest being added to the loan balance that wasn’t being paid) as a form of reserves. It is their way of drawing money out of the house for their use. Not my favorite way of getting reserves, but in their cases it can work for a number of years.

The simple answer to winning is planning your future, taking advantage of the market place, and most of all seizing the opportunities that are presented. Those who did won; those who didn’t…well they know what happened. The bottom line is that we can all learn today and prosper in the future.