Your personal debt level can be having an adverse impact on the way that you live. Credit cards, student loans, auto loans and department store debt can quickly add up — factor in interest rates of 10, 12, even 20 percent or more and the burden on consumers can be tremendous. If you are a homeowner, a readily available way to handle your debt load can ease the burden for you. Yes, tapping the equity in your home is one way for you to consolidate debt.
Residential Debt Consolidation
The longer you live in your residence, the more likely you have built up a decent amount of equity in your home. As you pay down your mortgage and enjoy the rising value of your home, the difference between your mortgage’s pay off amount and its current value is what lenders consider to be the equity in your home.
Let me give to you an example: You bought your home just over four years ago for $185,000, taking out a mortgage loan for $165,000. At that point your equity (or piece of the pie) is $20,000. Between making fifty payments to the mortgage company and kicking in an additional $50 whenever you had it, your outstanding balance has been reduced to $152,000. What’s more, your home’s value has increased nicely, thanks to a robust housing market.
An appraisal of your house reveals that it is now worth $219,000. The difference between $219,000 and the $152,000 outstanding balance on the mortgage loan is now $67,000. That latter amount represents your home equity, a portion of the amount you can use for debt consolidation.
Home Equity Lending
Lenders will look at your home’s value ($219,000) and allow you to borrow as much as 80% of that amount ($175,200) minus the amount you owe on your mortgage ($152,000). Therefore, you could borrow as much as $23,200 ($175,000 - $152,000) to cover debt, living expenses, and even take a vacation. Of course if your debt level is much smaller than that, you may simply want to borrow enough money to pay off your debt and then allow 5-10 years to pay off your low, fixed-rate home equity loan.
Home Equity Loans — Tax Advantages
Most homeowners are able to take advantage of tax deductions for their home mortgage. However, those deductions do not extend to cover most personal debt. On the other hand, a home equity loan is usually tax deductible even if the monies were used to pay off personal debt. In other words, you can let the government reward you for paying off high interest rate credit cards and other loans by giving you an extra deduction come tax time.
Worth Your Consideration
Of course, whether it is personal debt or a home equity loan, you will have to pay off what you owe. A financial calculator can help you compare your outstanding debt with a home equity loan to help you develop a plan that is affordable, tax deductible, and much lest burdensome then the high interest rate personal debt you are presently battling.
October 22nd, 2007 at 6:01 am
October 23rd, 2007 at 10:27 am
Using your home equity to manage debt is a double edge sword. Too many consumers use debt as a tool to live beyond their means.
I have done hundreds and hundreds of Home Equity loans where unsecured debt has been consolidated into a lower rate Home Equity loan with a tax advantage. Sounds like a good idea, right? Well, I would say more than 75% of those folks had built up large debt burdens within 36 months all over again. I see it as more of a lifestyle problem than a debt problem.
Now, in all fairness, many of the areas I have seen leave homeowners mortgage poor due to the cost of housing. Meaning housing costs (and other living expenses) take a large chunk of income. As a result, many homeowners must take on debt for large required purchases simply because they do not have any positive cash flow. In fact, the savings rate in the US is now a negative number. That means that we as a nation, spend more than we save.
But there are things that can be done to better manage your debt instead of gobbling up your equity. Just say no.
Say no to that brand new car or the plasma TV or the designer clothes for the kids.
If you can create a cycle of leaving your home equity in tact, let appreciation and mortgage balance reductions will give you liquidity to keep your next mortgage payment lower.
That being said, there are good reasons to use a Home Equity loan. Smart home improvements (stop watching HGTV for goodness sake, no one lives like that!), college tuition or another one time need for cash. I dont even think a Home Equity loan for an auto purchase makes sense anymore since you can get great rates with bank or credit union. But if you get one, make sure you get a fixed rate installment loan and make the same payments you would if had a higher rate.
Be smart with your home equity, dont treat it like a cash register.
I would be happy to answer any questions about Home Equity or Mortgage loans, including good banks. I am not a broker, just a lending executive with 15 years experience (looking for a new position
Email me at vancini@sbcglobal.net with any questions.
October 23rd, 2007 at 5:56 pm
Hi Jim,
Thanks for stopping by and taking time to comment.
I agree with you: taking money out of the house for frivolous reasons can land you in hot water. People who are undisciplined about their financial situation will soon find themselves in trouble.
Our federal government is doing what consumers shouldn’t be doing — spending more than what we have. Clearly, for some people, living beyond their means is a bad habit so taking on any additional debt can cause more trouble than it is worth.
Regards,
Matt Keegan
November 1st, 2007 at 1:16 pm
yeah, people should not rely on the money that they could tap on, rather, on the money that they have right now. Regarding the spending beyond their means, I think it’s because of the lifestyle that we see on the celebrities as well, it’s not a secret that it’s the “ordinary people’s” hidden desire to be rich and fabulous, right? So I guess, the media could turn the focus on the lifestyle that the rich and famous have down and focus more on teaching the people how to handle their finances more effectively.
November 1st, 2007 at 1:26 pm
DC, thank you for taking the time to add your thoughts.
Spending beyond our means is a big problem. As you indicated, what people see on the television and on the big screen isn’t real life. So, if someone is borrowing on their home equity for all of the wrong reasons, then they will quickly find themselves in a heap of trouble.