Don't leverage your home too much -- own it!

Using your home as an ATM can be detrimental to your long-term financial health. The temptation arises from the attractive borrowing costs, tax deductibility of interest and impressive appreciation of real estate prices in the last several years.

Focusing solely on these attractive aspects ignores the longer-term drawbacks of overleveraging your home and the advantages of ultimately owning the property outright.

Much has been made of how consumers have reduced their monthly debt-service burdens by consolidating higher interest rate debts and refinancing mortgages at lower interest rates. Such is the magic of low interest rates -- it takes less to meet the monthly debt obligations. But those consumers have not reduced their debt load, only the monthly payments, and they've used their accumulated home equity to do it.

Dangers to overleveraging the home exist at every turn. Can borrowers simply turn off their desire and propensity for incurring debt, and shift their focus to the task of paying it back? What about the homeowner that has leveraged the home to the hilt with a high loan-to-value product should real estate prices pull back? Not having enough equity in the home to compensate for real estate commissions or other expenses incurred in the course of selling one home and buying another requires a substantial cash outlay or barring that, can figuratively handcuff the borrower to the house.

For many people, the home is their most valuable asset. Owning this asset outright is a giant leap toward retirement or attaining other financial goals. Many people have no realistic hope of retiring with a $500,000 balance in their 401(k)s. But owning the home outright opens a host of possibilities. Not having a monthly mortgage payment can drastically reduce monthly expenses. This prolongs the life of whatever existing retirement assets have been accumulated and for those still working, can significantly enhance the cash flow devoted to retirement savings or lifestyle upgrades. Just imagine how much better you could live without having to make a mortgage payment every month.

Owning the home outright is a significant asset that retirees can tap into via a reverse mortgage, a particularly valuable option in this era of low interest rates that have decimated the interest income of many seniors. Not having a mortgage also provides a boost to the nest egg if the borrower downsizes to a smaller home more befitting of the empty nest. The new home can be acquired for cash, preserving the lower monthly expense base that exists without a mortgage payment, with the remaining proceeds boosting retirement savings. Downsizing homes may also produce greater budget efficiencies through lower property taxes, property insurance and utility bills.

Using home equity as collateral for home improvement projects that enhance the value of the home, or investing in higher education or assets with higher return potential can pay off handsomely. However, the repeated use of home equity to fund big-ticket expenditures or consolidate other debts is not one of the markings along the path to financial security.

Monthly mortgage payments are more than debt service; they're also a forced investment plan. Over time, the accumulated share of home equity can grow to represent the majority of the homeowner's net worth. Depending upon how you use the proceeds, habitually borrowing against this equity can use up valuable future borrowing capacity and squander the opportunity to acquire a significant asset.

Greg McBride is a financial analyst for Bankrate.com.

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