An increasing number of home owners are boosting their mortgage balance at a time when it could be more financially prudent to reduce debt.

Freddie Mac says 63 percent of borrowers who refinanced single-family mortgages during the third quarter of 2001 increased their loan balances by five percent or more, compared to 58 percent in the previous quarter.

The increase was as high as 81 percent during the first quarter of 2000, but that was during the longest economic expansion on record when money practically grew on trees and jobs weren't threatened.

Now with the national unemployment rate expected to exceed 5 percent next month, and a weakened economy exacerbated by terrorism, piling on debt may not be the financially fit thing to do -- especially when the debt is often used to pay off other debt.

Earlier this year, MGIC Capital Markets Group said half of all borrowers who refinanced home mortgages tapped equity to pile on home-secured debt to pay off consumer debt -- credit cards, car loans and other debts -- not to lower their interest rate or shorten their loan term.

In previous refinancing booms from 1992-93 and from 1998-99, only 20 percent of borrowers refinanced to pay off consumer debt.

Experts say the best use of borrowed equity is always capital improvements -- home improvements, education and new business financing -- loans that generate a return on your money.

"Remember that an equity loan is an equity-destroying loan because after you get it, you have less equity," said Randy Johnson, an Upfront Mortgage Broker with Independence Mortgage Co. in Newport Beach, CA and author of "How to Save Thousands of Dollars on Your Home Mortgage" (John Wiley & Sons, $14.95).

But personal financial counselors also advise holding onto your equity except for emergencies in tough times -- which some Americans likely are experiencing.

"As mortgage rates continued to fall in the third quarter, and average home values continued to rise, many homeowners found it advantageous to increase the amount of their loans when they refinanced," said Vassilis Lekkas, Freddie Mac's principal economist.

The average contract interest rate for 30-year fixed rate mortgages was 6.59 percent for the week ending Oct. 19, down from 6.61 the previous week, according to the Mortgage Bankers Association of America. Not surprising, also for the week ending Oct. 19, refinancing activity represented the vast majority of mortgage activity, 75.5 percent of total applications, MBAA said.

Freddie Mac says home values grew about 36 percent in the past five years, but also forecast growth of only two percent to four percent from now until next year leaving home owners who have already tapped equity with little room to grow more.

The trend for higher balances, at an old loan-to-new loan median ratio of 1-to-1.17, has also included the trend of taking on private mortgage insurance (PMI) to make the larger loan fly.

PMI, often required on loans that are more than 80 percent of the value of the home, protects the lender, not the borrower, against the borrower defaulting on the loan.

MGIC also found earlier this year that, while of all borrowers who had PMI before refinancing, 63 percent of them were able to get rid of it on their new mortgage, among those who did not have PMI prior to refinancing, 15 percent of them tacked it onto their new mortgage.

"At a time when borrowers would be wise to cut back on their spending, far too many are being lured into putting their homes at risk, and thanks to PMI, are paying more than they realize to do it," said Nancy Castleman, consumer advocate and co-author of "Home Equity Loans: Beware of Fool's Gold".

Published: November 2, 2001

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.