Question: My wife and I bought our home two years ago for $400,000. We put five percent down. Today, our property is worth close to $700,000. We're thinking of taking out an equity line to pay off our cars. We're also considering using some money to buy new furniture and to pay for a cruise vacation. Since rates are so low, is this something that you would recommend? I might add that we don't have the cash to do these things but my wife is excited about the vacation and new furniture.

Answer: Unless you have a lot of discipline, I will have a hard time recommending your plan. I have no problem with tapping into your new-found equity and paying off your vehicle loans. Make sure you do so only if you are able to lower the interest rate. Taking out an equity loan simply to lower the payment will result in a loan balance long after the cars are in the junk yard.

I'd like make a few statements regarding personal debt that all homeowners should consider when managing their debt.

• Living within your means is the key to preventing an undesirable debt load.

• No matter how you look at it, debt is debt. A $40,000 balance on a credit card or a $40,000 balance on a home equity line equates to $40,000 in debt that must be paid off eventually. Personal net worth does not change if the debt moves from a credit card to a mortgage. I have had customers with thousands in high-interest credit card debt who also have huge equity in their home. Yet they were reluctant to transfer their credit card debt to a much cheaper (and tax deductible) equity line, because they perceive their house as their "nest egg."

• The objective of every household should be to position their debt so that it minimizes their interest cost, based on the expected holding period of the debt.

• When making decisions regarding your debt, take into consideration your own personal discipline level.

• Carrying debt is not necessarily a bad thing. With low, tax deductible mortgage rates, a lot of folks are perfectly happy to carry a mortgage because it enables them to do other things with their money, such as invest it in a retirement plan

If you find that you can lower your borrowing costs by taking out an equity line to pay off your vehicles, it makes plenty of sense -- as long as you have the discipline to pay off the portion of the equity line that you used within the same period. Don't drag out loans used to buy depreciating assets, such as automobiles.

As to the cruise, my advice is to be careful before you decide to borrow huge sums of money for a vacation. That falls into the "not living within my means" category.

As to the furniture, if you need it, go for it, but have a plan to pay off that portion of the equity line within a specified period of time -- certainly long before you need to buy new furniture again.

My advice would be to sit down with your wife and a competent loan officer and go over your situation in detail. If you can lower your borrowing costs enough to increase cash flow and increase your savings rate, a modest vacation might be earned.

Published: July 22, 2004

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, the president of PMC Mortgage Corporation in Alexandria, VA, is a mortgage columnist whose work has appeared in numerous consumer, real estate, and mortgage publications. Mr. Savage welcomes your questions for possible use in this column, however because of the volume of mail received, Mr. Savage cannot answer questions individually.