Your home, your ATM

By MP Dunleavey

Editor's note: Join columnist MP Dunleavey and a group of women as they seek to strip away the myths around money, liberate themselves from debt and find financial sanity. Follow the ongoing quest of the Women in Red every other Wednesday in Dunleavey's column on MSN Money.

Like most of the Women in Red, Beth has stuck to the straight-and-narrow when paying back her debt.

For the last few years, she and her husband have been living below their means, working hard to reduce his student loan, pay extra toward their credit cards and pay off their Mazda -- which they did last month. (Go, Beth!)

But life never follows a straight line, especially when it comes to money. So when Beth decided to go back to school last year in order to make a career change, she racked up about $18,000 in student loans, she and her husband relied on plastic to make ends meet, and their credit card debt ratcheted up to about $11,000.

While some personal finance purists might have advised Beth to stick to basic belt-tightening to pay down that burden now that she's done with school and working again, she and her husband made an unorthodox debt decision.

They weighed the pros and cons, monthly payments and tax deductions, and took out a $35,000 home-equity loan with a 10-year term at a fixed rate of 8.6% to consolidate their loans.

Was that smart?

The home-equity boom

When I said Beth's decision was unorthodox, I didn't mean it was unusual. Borrowing against whatever property you own has become something of a national pastime.

In 1995, homeowners cashed out a mere $11.2 billion in equity, according to mortgage lender Freddie Mac, compared with 2005, when home-equity borrowing soared to $243 billion (which doesn't include lines of credit).

While most home-equity borrowing is used to make home improvements, according to a telephone survey by Synergistics Research, a financial research company in Atlanta, nearly one-third of borrowers spent their home-equity cash on debt consolidation.

Of course, that doesn't make it a good idea.

Home sweet cash machine

Cashing out the equity in your home tends to be a risky proposition for a number of reasons:

Real estate values have hit dizzying heights in recent years and some markets are downright inflated, depending on whom you talk to. If you borrow too much and property values drop, you could wind up owing more than your home is worth. But even if the market remains steady, by borrowing against your home's value you risk ending up with little profit when you sell (read: no retirement boost), and in the interim you've tapped out a potential cushion in the event of a catastrophe. Perhaps worst of all, if you come to see your home like an ATM -- some banks even offer "equity" cards that act like debit cards to add to this temptation -- you risk ignoring the financial issues that put you into debt and wind up overspending your way back into the hole again.

Beth's careful logic

Fortunately, Beth viewed taking out a home-equity loan as a last resort, so she tried to peer into all the financial corners while researching this decision.

Point 1: "We had our home appraised a while back at $170,000, but houses in our area are hot, since we live near good schools," Beth says. "We could sell for about $220,000 without breaking a sweat."

Even better: Beth and her husband have owned their home for a while, and they only owe about $78,000 on their mortgage -- which they refinanced in 2003 at only 4.75%.

Borrowing some of the equity also seemed less risky to them because they live in Eugene, Ore., where homes are not generally considered inflated compared with other West Coast cities, like San Francisco, Seattle or even Portland, Ore.

Continued: A closer look at the numbers

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