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You’ve spent the past few years being dumb with money. You realize that now. Your credit cards are maxed out, you’re living paycheck-to-paycheck, and you cannot see a way out. You plan to sell some stuff and to take a part-time job, but you’re looking for other ways to ease the burden. If you’re a homeowner, one option to consider is tapping your home equity to consolidate your consumer debts.<\/p>\n
Just what is<\/i> home equity anyhow? Home equity<\/a> is the difference between what your property is worth and what you owe on it. If your home is currently worth $200,000, for example, and your mortgage balance is $150,000, then you have $50,000 of equity.<\/p>\n Under normal circumstances, this equity remains untapped, increasing slowly with time. There are, however, a couple of ways to use home equity for other purposes:<\/p>\n Traditionally, home equity loans (and lines of credit) have been used to fund property improvements such as remodels and additions. Over the past decade, however, it has become fashionable to use this money for consumer spending. Or for debt consolidation.<\/p>\n Using home equity to pay off debt is an appealing option. You can obtain a loan with an interest rate in the neighborhood of 8%. Your credit cards probably charge twice that. If you’re paying on multiple credit cards, it’s likely that your combined payments are higher than the single payment on a home equity loan would be. And in most cases, interest paid on a home equity loan is tax deductible, the same as mortgage interest.<\/p>\n However, home equity loans are not<\/i> a panacea. They don’t eliminate debt \u2014 they just shift it from high-interest to low-interest accounts. And if you fail to change the habits that led you into debt in the first place, you will likely accumulate even more debt in the long run. Most importantly, a home equity loan puts your house at risk \u2014 credit cards do not.<\/strong><\/p>\n Despite these drawbacks, debt consolidation can be an excellent way to arrest the downward spiral and to take control of your finances.<\/p>\n I took out a home equity loan to pay off my<\/i> credit cards.<\/p>\n In 1998, I had more than $16,000 in credit card debt. I applied for \u2014 and was granted \u2014 a home equity loan. I used this money to pay off my outstanding debt. I cut up my credit cards. When I was certain that my balances were paid in full, I cancelled the accounts.<\/p>\n I paid faithfully on this loan for five years (it had a ten year term). But when we bought our new home in 2004, the intricacies of the transaction (read: my lack of savings) forced me to fold my previous home loan into a new HELOC: $21,000 at 6%.<\/p>\n\n
<\/span>Robbing Peter to Pay Paul<\/b><\/span><\/h2>\n
<\/span>My Story<\/span><\/h2>\n