This debt management article informs you to use caution when considering home equity debt consolidation loans.
Consumer debt, defined as debt not secured by real estate, is at an all-time high in this country, and it’s a troubling sign because there appears to be no end in sight.
The results of all this consumer debt include soaring credit card debts and personal bankruptcies rebounding quickly, even after the passage of bankruptcy reform legislation.
Naturally, many people with high credit card debts are looking for a way out. Because of the nature of “revolving” credit card debt, which accumulates on a daily basis, many consumers find themselves feeling hopeless, fearing that they will never get their debts down to a manageable level. It’s no wonder there’s now a whole new industry geared to making money while helping people out of their credit card debts.
We’re referring to the home-equity and no-equity debt consolidation loans you now see advertised continuously on TV, radio and in newspapers. And while these types of loans can sometimes be a good decision, don’t sign on the dotted line without considering the negatives as well as the positives.
On the positive side, using a loan secured by your home to pay off your high interest credit cards can make sense when you look at the numbers. First of all, the interest is almost always a lower fixed rate, so in comparison to the interest on your credit card, you save money. Also, because it’s secured by real estate, the interest is often tax-deductible. Finally, your monthly payment is likely to be a lot lower than the combined monthly payments of all the debts you can wipe out. Having pointed all this out it sounds like a no-brainer, right?…..WRONG!
The biggest negative to a home-equity loan is that you are effectively gambling your house that you won’t ever have a problem making the payments. At least with credit card debt, no matter how badly in debt you may be, no matter how unable you are to pay the bills, they can never take your house. So before you commit your home to such a loan, be 100 percent sure you’ll be able to make the payments.
Another huge negative to this type of loan is the danger of getting into credit trouble again. If you take out a home-equity loan, pay off all your credit cards, then run up your credit card debt again, you’ll then have a huge credit card debt AND your obligation to pay off the home-equity loan. So the next big question you have to ask yourself is, have you learned your lesson about credit cards? If the answer is yes and you take out a home-equity loan, you better be sure because, again, you’re betting your home on it.
As for the reduced monthly payment, while that payment may be less, remember that a home-equity mortgage is usually a commitment that can last anywhere between 15 and 30 years. That’s a long time to pay off your credit cards and other consumer debts.
The last big negative to taking out a home-equity loan is that it strips you of any flexibility you may have should you decide to sell your house. This is especially true if it’s one of the no-equity loans that exceeds the actual value of the home. In order to sell a home, all debts on the house have to be cleared, including first mortgages, second mortgages and home-equity loans, So if you owe more on your house than it’s worth, you have to make up the difference to sell it. And chances are, if you’re in this predicament in the first place, you don’t have that kind of money lying around.