The Consumer Debt Trap
A recent survey determined the average American family has consumer debt balances of over $10,000. Once a debtor gets into the position of carrying credit card balances over from month to month it becomes very difficult to pay the balance down to zero because of high interest finance charges and carrying fees.
Utilizing Home Equity Consolidation to Lower Debts
There are many uses of a home equity loan. Many home owners borrow against their equity for home improvements, college tuition, even vacations. The loan money can be used for virtually anything. One of the best uses for the loan is to pay off high interest credit card and other consumer debt.
Benefits of an Equity Debt Consolidation Loan
One strategy for getting credit card debt paid off is applying for a real estate equity consolidation loan. This approach will not miraculously remove debt however the loan will allow the debt to be paid off with lower monthly debt payments. Credit card interest rates charged on unpaid balances are high and getting higher. Additionally, these rates most often fluctuate with the prime bank rate making it impossible to work out a longer range budget to pay the balance off. Once consolidated into a home equity loan the payment and interest rate can be fixed. Also, there will be an immediate positive impact on monthly cash flow as the one new equity loan payment will be lower than the combined payments of the debt paid off. With only one debt payment one can plan to be debt free in a few years.
The Disadvantages of Home Equity Loans
Home equity consolidation can be very useful. However, it is always important to use loans prudently and borrow only what can comfortably be paid back. All loans create another monthly bill to pay. If the funds are used to pay off credit card balances then discontinuing credit purchases to avoid piling up more debt is mandatory. Increasing total debt by not curtailing charges on credit will create a deeper and more serious financial crisis. If a home equity loan used for debt consolidation results in financial over-extension then the consequences could very well end up in foreclosure because now the debt is collateralized whereas consumer debt is not.
Also, there are other disadvantages one should be aware of. First of all, although the interest rate charges are lower than the debt paid off with the loan, the term of the loan is generally for years – much longer than someone who could pay off consumer debt without a loan would carry a balance. This means there will be many more debt payments with interest on each payment adding up to more total interest than if the debtor just “tightened the belt” and paid off their consumer and card debt within months rather than years.
So if the new home equity consolidation loan monthly payment is within the budget, has lower interest rate finance charges and still does not leverage the home more than 80% accounting for all mortgage debt, this debt consolidation strategy can be a good way to refinance high interest credit card and consumer debt.
By: Mason Smith
Posts Tagged Interest Credit Card
Home Equity Consolidation
Sep 10
The majority of Americans carry some sort of credit card debt. Unfortunately, many of us carry so much debt at such high interest rates that it becomes difficult to make a difference in the amount we owe, even when we send a payment to the credit card company each month. Falling behind just makes it worse, with late fees and finance charges added on to your next statement- and often a late payment will result in an increase in your interest rate. High interest rates quickly add up and result in our monthly credit card payments doing little or nothing to reduce the balance. It’s a vicious cycle that can be difficult to get out of.
One effective solution for getting off the credit card rollercoaster if you are currently a homeowner, may be to obtain a home equity loan and use it to pay off your high interest credit card debt. Homeowners often take home equity loans to make home improvements, figuring that the improvements will increase the value of their home and therefore make the loan worth it, but why not take a home equity loan to eliminate high interest debt and make it easier to pay your monthly expenses?
The Benefits of Refinancing Credit Cards with a Home Equity Loan
There are a number of benefits of credit card refinancing, with the most obvious one being the decrease in interest rates you are paying. The other primary benefit is the fact that you aren’t incurring more debt when you pay off your credit cards with a home equity loan – you’re keeping the amount you owe the same and moving the debt to a more affordable repayment method. If you had previously been struggling to make several individual payments every month, using a home equity loan to pay off your credit cards will result in a consolidation of your debt, making it easier to pay.
Additional benefits of refinancing credit cards with home equity include:
eliminating variable interest rates and getting a fixed interest rate
obtain a tax benefit with an interest rate tax write-off on home equity loan interest that could not be done with credit card interest
consolidate a number of monthly payments into a single, often lower, payment
easier record keeping, write and mail one check a month and make one transaction in the check register rather than multiple.
Disadvantages of Paying Off Credit Cards with Home Equity Loans
Like everything good in the world, there are also some disadvantages to using a home equity loan to pay off credit cards, that you’ll want to consider, though. For example, once you pay off the credit cards, you suddenly have lots of room on them to charge new purchases! This can be extremely tempting, and if you’re not disciplined, you could end up charging more debt and making your situation even worse (because now you have the home equity loan PLUS the additional high interest credit card debt!)
It’s a good idea to either get rid of the credit cards by cutting them up, or by placing them in a fire safe box in your home so that you aren’t tempted to pull them out of your wallet when you’re out shopping. Refinancing the credit card debt with a home equity loan can give you the opportunity to live credit card-debt free. Most financial advisors do not recommend calling to physically cancel the accounts right away, because reducing the amount of “available credit” will often have a negative impact on your credit score.
By: Debbie Dragon