Consolidating Debt Through a Home Equity Line
By Elizabeth Dougherty
Is taking out a home equity loan – to pay off
credit card debt, car finance debt and consumer
debt – a good idea or a bad one?
Yes and no.
It could be a great financial move, or it could be
a disaster. It depends upon many factors, not the
least of which is you and how disciplined you
will be in making timely payments on your home
equity loan.
Good Debt Versus Bad Debt
If you do not believe in getting loans or using the
financial leverage of other peoples' money, like
the banks, then for you there is no such thing as
a good debt. For investors, however, bad debt
is borrowing money to buy something that will
never go up in value and begins going down in
value the day you buy it, namely a depreciating
asset. Borrowing money (by charging on your
credit card) to buy that giant screen tv is not
a great financial move. Neither is borrowing
money to buy that new car. A car, a jet ski, a
giant plasma screen television; these are all
depreciating assets.
Good debt is when you borrow money to
purchase something that will go up in value – like
real estate
Sinister Credit Card Practices
Credit card debt can be fairly sinister. We are
all familiar with those "low introductory rates"
for the first six months, but few people are
aware of how much money credit cards actually
charge. The average interest rate on a credit card
purchase is 14.53 percent, according to an MSN
financial survey of the top 20 banks.
But it gets worse. The average "late fee" is
$28 with some cards charging as much as $39
per incident. There is the nefarious "universal
default" which allows your credit card issuing
company to raise your rate up to 32.34 percent
on their card if you get behind on any other credit
card or any other loan.
http://www.msnbc.msn.com/id/18849144/
(Did I mention that Capital One's CEO, Richard
Fairbank, was paid more than $31 million dollars
in 2006? I wonder what's in his wallet?)
How Much Debt?
Excluding real estate debt, nationally the average
amount of money owed per individual on credit
accounts (credit cards) and fixed loans (car loans)
is $15,544 with an average monthly minimum
payment of $752 per month – and that's just the
minimum. (Credit reporting giant Experian has
some great information at http://www.nationalsc
oreindex.com. At this rate it might take you ten to
twelve years to pay off your credit card debt. Ten
years to pay off a credit card! Imagine that.
In Alabama, the average debt load – not
including mortgage payments- is about the same
for ages 40-49 years at $15,986 and $14,109 for
ages 30 –39 years old.
Home Equity Loan to the Rescue
A $15,000 credit card balance will cost about
$750 per month and take about 10 years to pay.
If you borrowed $15,000 at 8 percent on a 10-
year home equity loan (and paid off the credit
card debt completely) your payments would be
only $188 per month and the loan would be
completely paid off in 10 years. You would save
about $530 per month for 120 months or about
$67,000!
It gets better. Home equity loans are almost
always tax-deductible. Your $188 per month
payment is made with pre-tax dollars. Since
you can tax-deduct the interest, on your actual
payment is about $140 depending upon your tax
rate.
So What is the Bad News?
Two things. First if you are not careful you might
end up accumulating a big balance again. Then
you would owe money on the home equity loan
and your credit cards. The most important factor
is that you are putting your house at risk if you
do not make timely payments on the home equity
loan.
However, done correctly, a home equity loan
can pay off debts and save you thousands and
thousands in interest.
Elizabeth Dougherty, a resident of
Auburn, is a former Real Estate Broker
and Mortage Broker. She can be
reached at EADougherty1@aol.com.
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