Family home finance

Home values are way up, interest rates are way down, and personal incomes have been way stagnant. Should you tap into that burgeoning home equity to fix the family room, buy a new cat or pay off credit cards? For millions of Americans over the past two years, the answer has been a no-brainer, Fueled primarily by interest rates, the total outstanding value of mortgage debt hit a record high in recent months--while owners' equity as a percentage of home values dropped to an an-time low.

The reasons behind the surge in home-equity borrowing are both obvious and compelling. The interest rate on a home-equity loan or line of credit tends to be far less than that on credit cards, interest is tax deductible (unless you get a jumbo loan, worth more than the value of the house), the repayment terms are spread out and somewhat flexible, and just about anyone with a house has access to the money.

"Home-equity borrowing is a new form of financial heroin," says Rick Adkins III, board of governors chair for the Denver-based Certified Financial Planner Board of Standards Inc. and CEO of The Arkansas Financial Group Inc. in Little Rock. "[Home-equity loans are] great. They're marvelous. They're so good, they can get you into big trouble."

Big trouble? Oh yeah, that whole part about losing your house if you can't pay back the money. Fall behind on your credit cards, and you torpedo your credit rating; fall behind on your home-equity loan, and you might have to call the movers. Especially for people who use home equity to consolidate debts, the lure of easy money can be a siren song. A year or two down the road, the credit card debt might have crept back, but by then, the house is on the line, too.

Many borrowers set a trap for themselves by extending almost to the breaking point to buy homes and then borrowing against whatever equity they do have. As long as interest rates remain low, the home-equity loan payments are manageable. But if and when rates start to rise--and they will rise sooner rather than later--the variable rates on those loans will trend higher as well.

"When you're paying an interest rate, whether it's increasing or not, the fact that [it's] deductible does make it more attractive than other forms of debt," Adkins says. "The key is, don't use home equity to pay for vacations and stuff that's really just consumption." Or, if you already have, Adkins says, "get a handle on it now, before rates turn around on you."

SCOTT BERNARD NELSON is a financial writer at The Boston Globe.