Many homeowners with home equity are thinking about hitting that equity like an automatic teller machine for some cash. The total value of their home equity hasn’t completely disappeared during this recent market downturn. After all, most are getting letters announcing rising interest rates from their credit card companies.

Over the past couple of decades we’ve been conditioned by lenders and government policy to use our home’s equity to pay credit card balances, for big weddings, new cars, college tuition and even investing in the stock market.

A Quick Tip:
About Not Using Home Equity Loans

Home equity lines have become almost like an ATM machine. Well, actually a credit card. After all, they’re structured about the same: You can borrow up to the account limit all at once or take little amounts as you want to spend.

According to Synergistics Research, a financial services research firm, between 2001 and 2006, roughly twenty-four percent of homeowners purchased a vehicle using a home equity line of credit.

Since the bonanza has ended, home equities have evaporated. The once elated lenders are now tightening their standards of who qualifies. Some homeowners with unspent funds in their present lines of credit are seeing the credit lines snatched away.

The pickle we’re in factually began with a shift in the tax code back in late 1986. Congress discontinued deducting interest paid on personal loans from our income taxes. Astonishingly, credit cards and car loans weren’t such cheap money. Determined spenders embraced house debt instead, which has financed their decision to spend money before they have it.

You may be thinking: If I can still write off the interest on a home equity loan or line of credit—assuming I’m likely to qualify in the current climate—it’ll a smart way to get extra cash, right? Not so fast. Let’s take a look into the most common reasons people take on home equity debt. Then ask yourself if there are better alternatives.

To use on emergency spending

Some of you are thinking, “Serious times call for serious measures.” Look: Using borrowed money to pay for everyday expenses is adding trouble on top of trouble.

How will you get by? You will. Suck it up. It’s time. You’ll get by! Millions and trillions got by without spending money they don’t have. You can too. You’ll live through it. You’ll be safe. If you’re living well now, consistently put some aside as a rainy-day fund.

To pay off a credit card

The average American household owes $9,840 in credit card debt. I ‘ve met people who owe more than their annual household income at a double-digit interest rate. To these people, a home equity loan looks absolutely sensible.

But if they haven’t mended their spendthrift ways, a home loan won’t help. A study in the late nineties found that nearly two-thirds of those who obtained a home loan to pay off credit card balances, ran their balance up again to the original indebtedness within two years.

The worst case scenario gets uglier. Home equity loans are “secured debt.” Should you file for bankruptcy, you lose your house. I never have understood this. Credit card debt, because it’s not backed by an asset, is “unsecured,” and in a Chapter 7 bankruptcy proceeding can be wiped away. When you have spent money UN-secured, why would you secure it? Duhh!

To buy a car

I cringe when people tell me, “I paid off my car loan with my home equity loan.” You haven’t “paid off” the car loan. You’ve only moved the debt to your house. You’ve increased the liability against your biggest asset. Understanding this behavior pattern as I do, I think you’ll probably do it again.

If the interest rates on both loans are the same, the home loan might save you a few hundred dollars when you figure in the tax deduction. Goody, goody gum drops. Most home equity lines of credit use a variable rate—when the interest rate moves up, the interest charged on your home equity line also rises. Lately, the prime rate is inching up.

So, how about a home equity loan with a set interest rate? Because the house loan’s term—how long you have to pay it back—is five to 10 years longer than the average five-year auto loan. You’ll end up paying more interest over the life of the home loan, erasing any savings from the tax deduction. Duhh!

To pay for college

Americans have a weak spot when it comes to sending children to college. By the time your kids are grown, you should be shedding debt to prepare for retirement, not piling it on. If your child is already college age—and you neglected to save in advance—there are alternatives to borrowing against your house.

Scholarships, grants, Work Study jobs aren’t just given to incoming freshman. I’ve been told by numerous groups I’ve spoken to that they have smaller scholarships ($250-$1000) that aren’t even applied for year after year after year. Hey, that’s enough to pay for some books or lab fees and some tuition. Each and every year apply for scholarships. They are out there. Keep looking for those scholarships and grants. It’s like finding free tuition money. You’ll find them if investigate.

Consider Jr. Colleges the first two years and state schools, which generally cost less than private ones; your kids may even be able live at home. Lastly, apply for financial aid. If your income is low enough, you may also qualify for low-interest federal loans. Remember, student loans are an investment in your child’s future–but they’ll put him/her and or you in debt. Home equity debt should be your last resort.

Resource: Broke ! Second Edition: College Students Reveal The Secrets To Getting By On Less by Supurna Banerjee (Kaplan, 2005)

To invest

Don’t even start me on this. I’ll never forget the evening I was sandbagged by a lady that claimed home equity was the worst place to have money. If I’d known then that she was a mortgage broker, I’d have verbally torn her to pieces. She claimed people could make more money in the markets than they could making an extra payment or two on their homes.

Here’s the real deal. Buying stocks and bonds with savings is investing. If you know what you’re doing, it makes more money than a bank CD. Problem is, most people don’t know what to buy. Buying stocks and bonds with borrowed money is called gambling. If you use home equity as the seed money, it’s gambling with your house.

Interest rates on home debt are hovering around 4.5 to 6 percent for a line of credit and 7 to 8 percent for a loan—low by historical standards. But if interest rates rise, what you owe may increase at a faster rate than your investments. You lose; the bank wins.

Repairs or remodeling

Borrowing against your home makes sense to make those repairs that, if not done, will harm the house’s value. I’m talking about a badly leaking roof or rotting beams, not a deck, extra bathroom, or a $25,000 kitchen make over. Elective projects should come out of savings, even if you think they’ll increase the house’s worth. Statistics show that few improvements make back every dollar when you sell. Using savings for renovations also tends to make people spend less and more wisely.

Today, many homeowners owe more on their house than its market value because they disregarded basic wisdom. If you’re tempted to use your home as an ATM, remind yourself: If it was really my money, I wouldn’t be borrowing it in the first place.