Both a borrower and a saver be: Housing in the household portfolio

This study investigates the importance of home equity borrowing on household financial decisions across the wealth distribution. Home equity borrowing has grown consistently since the Tax Reform Act of 1986 prioritized residential mortgage borrowing. This tax benefit is one of many reasons households may choose to borrow their equity; debt restructuring and consolidation, securing a lower interest rate, and housing appreciation contribute as well.; Wealth influences how homeowners make borrowing and savings decisions and compositional choices between assets and liabilities. Households who simultaneously borrow home equity and retain liquid assets are specifically analyzed. This financing choice would seem irrational; households are paying interest on secured debt while holding funds aside in low or non-yielding savings vehicles. This study incorporates mental accounting and buffer stock theories to explain why a household would both borrow home equity and hold liquid assets.; My analysis supports and extends the empirical literature on housing's role in portfolio composition. A sample of homeowners is drawn from the Survey of Consumer Finance (SCF) from 1995 and 1998. Independent variables are created from socioeconomic, loan, and behavioral characteristics in the SCF to explain borrowing-to-save behavior. The sample is segmented into wealth quintiles to evaluate housing and financial characteristics by total wealth concentrations. After testing differences between the households with wealth in the lower 80 percent and the upper 20 percent, the analysis focuses on the less wealthy. The logistic procedure on pooled data from 1995 and 1998 confirms the importance of employment and financial sophistication characteristics for the lower wealth group. Differences between 1995 and 1998 are also tested. The results show evidence of buffer stock saving, as those with greater income uncertainty have a greater likelihood of borrowing to save.; This research clarifies the need for financial education in a broad format to advise households of their home financing and portfolio composition options. A greater understanding of tax issues would benefit homeowners in regard to their equity borrowing abilities, and increased knowledge of retirement needs may assist in home equity management over the life cycle.