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SAN JOSE, Calif. — So much for the good times. At work, cost-cutting companies are handing out pay cuts and pink slips. On Wall Street, stocks remain comatose despite the Federal Reserve’s repeated rate-cutting attempts at resuscitation. Meanwhile, the bills just keep piling higher at home.

The only place that you can find hope, it seems, is in your mailbox, with those tantalizing fliers that tout how they can easily and inexpensively consolidate debts by tapping home equity.

Can you save money by refinancing and taking out cash, grabbing home-equity loans or securing a line of credit tied to your home equity?

It depends how you define “save.”

Managing debt is just as important as managing investments. But a home is often the biggest asset many Americans have, and bleeding the equity dry can cripple people who are relying on that cash to pay for retirement and other long-term goals. Too often, Americans turn to such loans to increase cash-flow without addressing the underlying habits that put them in debt in the first place. Too many wind up deeper in hock within just a few years.

Such loan products are “marketed as offering lower payments than you are currently paying, but that can actually backfire,” said Gerri Detweiler, author of “The Ultimate Credit Handbook” and an adviser to Myvesta, an online credit-counseling firm. “You can end up with more debt, longer repayment periods and be unable to ever dig yourself out.”

Added Sheila Daley, a certified financial planner in Los Gatos: “My question is, ‘What do you want to do with the money?’ If you’re going to do smart things with the money, that’s fine. But if you’re going to spend the money on things that decline in value, get thrown away and get used up, I don’t think that’s a wise use of equity in your house.”

Homeowners eager to tap their home equity began streaming into lenders and brokers in January, soon after the Fed began trimming short-term interest rates, creating a logjam this spring that doubled the time it normally takes to refinance. As June ended, the Mortgage Bankers Association of America reported that mortgage applications were up 54 percent compared with 2000, with 44 percent of that for refinancing.

It’s easy to see why home-equity products are so tempting:Rates on 30-year fixed-rate mortgages are hovering at about 7 percent. Meanwhile, the Fed has cut the prime rate six times this year, pushing it lower than the average rate on 30-year fixed mortgages for only the second time in five years, according to Bankrate.com, which tracks rates on all sorts of loans. That means homeowners are finding it might cost them less to take out a home-equity loan or line of credit than to refinance their first mortgage.

Home-equity loans and lines of credit are generally cheap to secure. For example, lenders often will perform inexpensive “drive-by” or computerized appraisals, forgo title searches and streamline the credit-review process, said Michael D. Larson, an analyst with Bankrate.com.

“Many banks won’t charge you anything,” he said. “They just want the business.”

The interest you pay on such loans generally is tax-deductible — something that hasn’t been true for other consumer loans since 1986.

That’s on top of the fact that these loan products charge much less than conventional credit cards and many car loans.

A line of credit can provide cash in an emergency — like a layoff. (But line it up before you get the pink slip.)

Some homeowners use their equity to invest in stocks, a business or even themselves, in the form of education. But this can be a risky strategy if the investment doesn’t perform well enough to pay off the loan. In the end, a sour investment could cost you your home.

“It’s imperative that someone do this only if they have a long-term time horizon,” said Joyce Franklin, a certified financial planner and CPA who heads Franklin Financial Advisors in San Francisco.

Consolidating debt at a lower interest rate also is like letting out the waistband of a favorite pair of too-snug pants because it creates slightly more room in your monthly budget.

“That will free you up to get started on a college fund, or have some breathing room, or maybe help if you want to have a baby,” said Cynthia Martin, who heads XCEL Financial Group, a Scotts Valley mortgage broker and lender. That money “can make all the difference. People want to do things — they just don’t know how to do it.”But some experts are spotting ominous signs in the current refinancing boom. Half of the homeowners who have refinanced recently did it to pay off credit cards, car loans and other consumer debts — not to lower their interest rate or shorten their loan term, according to a statistical analysis by MGIC Capital Markets Group in Milwaukee, Wis. In the refinancing booms of 1992-93 and 1998-99, only about one in five borrowers did so. Many homeowners tapped so much of their equity that they now must pay private mortgage insurance premiums to protect the lender, a cost they did not have before refinancing.

One risk of consolidating consumer loans: It turns unsecured debt into a bill that can cost you your house.

Borrowing your home equity should be used like a “fire extinguisher, as a last resort,” said Jordan E. Goodman, author of “Everyone’s Money Book.” “The problem is, people use it as a first resort. People look at it as a way to pay off food bills, credit cards or vacations. They use it cavalierly.”

Although there is clearly a philosophical disagreement over the issue, many financial experts believe home equity is an asset to be conserved, not depleted.

“It feels very nice to know the money is there,” said financial planner Daley. “When I retire, I don’t intend to stay here in the valley. That equity will go further someplace else than here. Having equity in your home can secure your retirement just as much as your 401(k), your stocks, your savings accounts and your CDs.”

Silicon Valley homeowners have enjoyed remarkable real-estate appreciation in recent decades, but it’s risky for borrowers to assume that home prices won’t drop if the economy continues to misfire. Indeed, the median price of a home in Santa Clara and San Mateo counties sagged in May, the first year-over-year decline since 1995, according to DataQuick Information Systems. May’s median price also marked a 5.4 percent decline from April — typically the peak of the home-selling season.

Recent homebuyers are particularly vulnerable if prices drop further — especially if they relied on inflated appraisals to qualify for their original loan, experts say. As was the case after the market peaked in 1989, some homebuyers could see their equity cushion disappear, locking them into a house that won’t fetch even enough to cover the mortgage.

But no matter how you crunch the numbers, one risk is incalculable: The risk that you’ll just wind up deeper in debt because you haven’t changed your behavior.

Some people don’t earn up to their potential. Some haven’t learned how to handle money smartly. Others just spend too much. Consolidating their loans fools them into thinking that the debt has been paid — and then they continue to splurge at the mall, restaurants and the auto dealership.

“Consolidating only changes who you owe,” said Marilynn Thain, executive director of Consumer Credit Counseling Service of Santa Clara Valley.

At some point, there will come a point that home equity no longer can bail you out. At times, mortgage broker Martin is forced to get blunt with clients who repeatedly drain their equity, telling them:

“This is your last chance. If you can’t get it right this time, this is it …. It’s like a maggot, a leech living off your equity. At some point it runs itself out.”

Copyright © 2001 Knight Ridder/Tribune Information Services. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

Using one’s home equity may be the loan answer

It’s natural to turn to home equity when you’re looking for ways to pay off consumer loans and to consolidate debts. But debt experts suggest you ask yourself these important questions first:Can you get out of this fix without borrowing? Examine your spending habits before you assume you must borrow. Odds are you can find places to cut back, freeing up money to pay down your debts faster, said Marilynn Thain, who heads Consumer Credit Counseling Service of Santa Clara Valley, Calif.

What can you sell to raise money? A garage sale is a good way to raise a few hundred bucks. But if your bills are higher, consider other assets that you can sell.

Can you boost your income? Taking a part-time job or seeking a higher-paying job is a quick way to add cash flow to your monthly budget.

Can you consolidate credit-card debt onto a lower-rate card? One advantage: You avoid turning unsecured loans into debts that could cost you your house. One disadvantage: Many credit cards offer tempting “teaser” rates that cut the interest rates for only a few months. Unless you pay off the loans quickly, the interest rate will jump.

Can you borrow against a whole-life insurance policy? This can be an easy and inexpensive place to turn for cash, but think twice if beneficiaries couldn’t survive financially on a reduced insurance payoff if you died.

Can you borrow from your 401(k)? This is typically a last resort — perhaps even one that ranks behind borrowing against your home equity. Some people borrow against their retirement savings because at least they’ll be repaying themselves rather than a creditor.

But don’t overlook the main risk of a 401(k) loan: If you are fired or leave the company, you generally must repay the loan within 60 days. If you fail to do so, the unpaid balance is considered a withdrawal that is subject to income taxes plus federal and state penalties totaling 12.5 percent.

Copyright © 2001 Knight Ridder/Tribune Information Services. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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