How much is too much equity debt? It depends -- Page 2

On top of all this math, there's another ratio to think about: the size of the second mortgage compared to the first mortgage.

Generally, the second mortgage shouldn't be for more than 30 percent of the first mortgage. So, if you're first mortgage is for $100,000, it's best to limit the amount of the home equity loan or line of credit to $30,000.

It's more than math
None of these rules are hard and fast. A bank might lend you 100 percent of the value of the house if you have good credit and you hold almost no other debt. If you have a poor credit history, a reputable lender will deal with you more conservatively, perhaps limiting your total debt payments to 40 percent of your income or lending up to 90 percent of the value of the house.

Another factor is the type of debt you take on. A home equity loan is a lump-sum amount. You start accumulating interest the moment you sign the loan papers. Your monthly payments repay the loan over a set period. An equity line of credit behaves more like a credit card. You don't pay interest until you draw from the credit line. This means that you can get a home equity line of credit, or HELOC, and not use it for months or years. After you use it, you usually are required to pay only the month's interest.

These differences mean that a home equity loan is better used to repay a one-time expense: consolidation of debt such as credit cards and auto loans, or start-up money for a business. A line of credit is better for continuing expenses, such as a lengthy home renovation, or tuition, or as a source of income in case of unemployment.

Hsieh says homeowners frequently use lines of credit to consolidate debt. That's OK, he says, if they continue to make the same monthly payments that they were making before. They'll pay off the debt faster that way because the interest rate is probably lower.

A line of credit "is a giant credit card that you can use to sort of manage your life," Hsieh says. "But it goes back to that one word -- discipline."

If you use a line of credit to pay off your credit cards, you can't afford to run up those credit cards again.

Kelly Rote, spokeswoman for Money Management International, which runs consumer credit counseling offices in 10 states, says the agency cautions clients not to use equity loans for debt consolidation "unless the borrower has made a commitment to changing spending behavior and has made a solid payoff plan."

Michaud delivers a final caveat: "Do understand that the loans, the lines of credit, are mortgages," he says. "People forget it all the time. It's a mortgage. It's a lien against your property."

And that means two things. First, if you don't repay, you can lose your house to foreclosure. Second, when you sell the house, you have to repay the loan in full at closing.