Locating the Closest ATM/Cash Machine

If you own a home in the SFBay area, you are LIVING in it! The mentality seems to be: "Why bother saving, when I am sure I can sell my house for a lot more than I paid for it! In the meantime, I might as well enjoy the equity I have NOW." It seems contradictory doesn't it. If the house represents your savings for the future as you insist, why are you blowing your savings now? To use it to consolidate credit card debt seems reasonable, but betting that home prices will continue to rise above historical rates, is just that, a gamble. From the SF Chronicle:

Traditionally, money "taken out of one's house" has been used to finance home-renovation projects. But according to an informal survey, more and more people are approaching their homes as their own private bank, with the equity line or refinancing serving myriad purposes. Some people use it to ride out difficult times during health crises and periods of unemployment. Others take advantage of its tax deductions (you can write off the interest), using it to consolidate credit card debts, pay for college tuition for their children and finance new cars.

Maggie Vaughn of San Francisco used her equity line to get herself off the credit card merry-go-round by using the money to pay them off all at once. "I was throwing all my cash at [my credit cards] to pay them off, and therefore had very little cash to spend and would often end up using the cards again," she explained. "Now, it's great! I pay cash for everything and do not charge anything and can even save money now."

And because equity loans are flexible -- you only pay for what you spend -- one loan can be used to attack several financial issues over a period of time. Marcus Pun of Oakland is considering getting a new equity line to pay off his credit card debt (used to foot the bill for his daughter's private school tuition), to pay for living expenses during a slowdown in work, to pay for remodeling his house to rent or resell it, to attend technical classes and to take his first real vacation in 14 years.

Although most people I heard from are using equity lines as a lesser-of-two-evils debt (better this than a credit card or a new car payment), some intrepid souls are tapping equity as a source of investment capital.

... Some even factor the monthly payments of the equity line into the equation. My mortgage broker, Michael Simmons, once had a client who took out a $500,000 equity line to pay for her elderly mother's home care and the monthly payments of the equity line itself. When I implied that this was nutty, he begged to differ. "It was a perfect use of the equity line," he said. "It's more flexible than a reverse mortgage and doesn't involve the equity sharing."

Indeed, equity lines -- although they can be abused -- offer homeowners loans with tax-deductible interest that non-homeowners just don't have. After decades of massive appreciation, most longtime homeowners have very different financial pictures than their non-property-owning counterparts. Equity lines of credit are also being used as a way for parents to ensure that their children enjoy similar privilege.

... But now the days of free money are long gone. Last year, the Fed raised interest rates 13 times, and my own equity line has jumped almost two points in six months.

As the short-term interest rates rise, people may begin to be less cavalier about home equity funny money. But the mortgage industry has sold the benign idea of refinancing and equity lines to the American homeowner, and it will take more than interest-rate hikes to change that cozy perception. It's going to take falling home prices, rising rates and the next fiscal crisis.

BTW, while rates are creeping up, they are relatively low because Asian central banks are stepping up their purchases of agency bonds (Fannie and Freddie), not just treasuries. They are saving like crazy, while the U.S. consumes like crazy: over-consumption is not exactly the most productive use of these foreign investment dollars.