Here's another short fuse for the powder keg housing market -- home owners are tapping the equity till and increasing their mortgage balances with cash-out refinances at the greatest rate since late 2000.

A cash-out loan is by nature an equity-depleting loan and should home owners hit hard economic times at the same time home appreciation stalls, they may have a mortgage with no equity cushion to soften the blow.

Home equity is the difference between the value of the home and the balance on the home mortgage and home owners may be gambling that difference doesn't reach zero.

They are also enjoying home value appreciation as high as it was during the same late 2000 period and the new loans are being closed with cheaper interest rates. Cheaper rates can lower monthly payments or keep them relatively the same.

Freddie Mac's "Cash-Out Refi Report" for the second quarter of 2005 reveals 74 percent of home owners trading in their old loan for a cash-out refinance are doing so to acquire a loan that is at least 5 percent larger.

The percentage hasn't been that high since the fourth quarter 2000. Since 1998, the percentage of home owners refinancing for loans 5 percent larger has been higher than 74 percent only during each of the four quarters prior to the fourth quarter 2000. The highest level since 1998 was 81 percent in the third quarter of 2003.

During the second quarter this year, only nine percent of those refinancing to take cash out closed with a smaller loan. That percentage has been smaller only four times since 1998. It dropped to 7 percent during the first quarter of 2001, Freddie Mac reported.

Home owners obviously were cashing in on mortgage rates that dipped in the second quarter this year and on the one-year, 23-percent increase in appreciation, an increase that also hasn't been matched since the fourth quarter of 2000. Annual appreciation has been higher only twice since 1998, 24 percent in the second quarter of 2000 and 26 percent during the third quarter of that same year.

"The second quarter (2005) cash-out refinance volume reflects, in part, borrowers responding to the fact that they may not be able to obtain such favorable rates in the future to fund home improvements or other big purchases," said Amy Crews Cutts Freddie Mac's deputy chief economist.

One half of the cash-out, refinancing home owners, in the second quarter 2005, had an old interest rate about 8 percent higher than the new loan, Freddie Mac said.

However, mortgage market monitors predict mortgage rates will rise at least to 6 percent this year.

Personal finance experts say home equity isn't collateral for frivolous expenditures.

The best use of the money is capital improvements and investments that provide an equal or greater return on your money than the cost of the loan. Cost-vs-value favorable home improvements, education for the kids and successful new business financing are relatively better uses of equity than, say, buying cars, boats and trips around the world. Emergency nest eggs, for unexpected events and debt consolidation can be other wise and necessary uses. That's provided debt consolidation doesn't become a habit.

Other more conservative financial planners say, given the uncertain nature of Social Security and pension and retirement plans, home equity should remain untouched until the mortgage is paid off. Without a mortgage payment, home owners can live relatively shelter-cost free, with only maintenance and up keep expenses, at a time when incomes traditionally shrink. After retirement, should home owners need the equity, it will be comforting knowing it's available.

The Federal Reserve, concerned that easy-money loans were prompting home owners to squander their equity, issued "Credit Risk Management Guidance For Home Equity Lending," earlier this year also to warn lenders their portfolios were too heavy with higher-risk loans. Interest-only, higher loan-to-value and low- and no-documentation equity loans, the feds said, are more vulnerable to interest rate increases.

Published: August 3, 2005

Use of this article without permission is a violation of federal copyright laws.

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.