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Old 10-30-2005, 10:17 AM
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Lightbulb risks for homeowners hanging on to their current houses after buying another

BALTIMORE -- Jeff Ciesla had watched people making money in the real estate market long enough.

So, when he and his wife, Quinn, recently decided to trade up to a larger home, he made his move. Instead of putting their rowhouse in the Canton neighborhood on the market, the couple cashed out $22,000 in equity to buy a Harford County town house with double the space and kept their city house, betting that its value would continue to grow.

"We had the conversation of wanting to buy a big single-family home, but we would basically pay the mortgage and be house poor,'' says Ciesla, 29, a pharmaceutical-sales representative. "We decided, why don't we keep this place a little while? We'll be getting rental income, and people will help us pay off the mortgage while the place continues to appreciate.''

With home values rising and interest rates still low, more homeowners like the Cieslas are hanging on to their current houses. Rather than following the traditional move-up pattern of selling one house to buy another, they use their swelling equity to cover the down payment and closing costs, rent out the first house and figure that in a few years they will be able to cash in big time.

But there are risks to "leveraging up,'' piling on debt based on the value of property on paper -- money that isn't real until the house is sold. Some buyers compound the game of roulette by using interest-only and adjustable-rate loans and counting on getting out with a substantial gain before their mortgage payments balloon beyond their ability to pay. And regulators worry that the practice could increase volatility in an already-hot housing market.

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