| Debt Consolidation may be a better | | | | you wanted to sell your home and it was now |
| alternative | | | | worth $150,000 you would have to come up with |
| | | | an extra $20,000 just to be able to satisfy |
| Have you seen those bank and mortgage ads on | | | | your financial obligation. In 1988, homes |
| TV and newspapers telling you to pay off | | | | throughout the country were at their highest |
| those pesky high interest credit card bills | | | | value. Then in 1989, due to economic |
| by tapping into the equity of your home? They | | | | conditions, many companies had laid off |
| make it sound real simple, apply on-line, | | | | employees and the housing bubble burst |
| call-us toll free, answers within hours, etc. | | | | causing homes in some parts of the country a |
| They almost sound too good to be true. We all | | | | loss of up to 50 percent of their value |
| know about the dangers of things that are too | | | | overnight! There is no reason why this could |
| good to be true. So, what are the dangers of | | | | not happen again. This is not a healthy |
| using your equity to pay off your credit card | | | | scenario. The good news about equity loans is |
| debt? A minor detail they forget to mention | | | | that they have lower interest rates than |
| in those ads; while banks frequently | | | | credit cards because they are secured against |
| advertise home equity loans as a way to | | | | your house. The bad news is these loans are |
| consolidate other high-interest debt, these | | | | secured against your house. If you miss a |
| loans don't wipe the slate clean. You still | | | | payment then you risk losing your home. Miss |
| owe the money, and now it's linked to your | | | | a credit card payment by itself and initially |
| homeownership. | | | | you will only have to listen to debt |
| | | | collectors, but you will still have your |
| Before we start, let's understand some | | | | home. |
| important financial terms: Unsecured debt is | | | | |
| not guaranteed by the pledge of collateral. | | | | The disadvantages of using a home equity loan |
| Most credit cards are an example of unsecured | | | | to pay off your credit cards: |
| debt, which is why their interest rates are | | | | |
| higher than other forms of lending, such as | | | | - By pulling money (equity) out of your home |
| mortgages, which employ property as | | | | to feed your spending habits, you may end |
| collateral. | | | | up homeless. |
| | | | |
| Secured debt is secured by a lien on debtor's | | | | - If you use your home to pay off credit card |
| property which may be taken by the creditor | | | | debt you lose your safety net. |
| in case of nonpayment by the debtor. A common | | | | |
| example is a mortgage loan. | | | | - Taking out more debt to pay off current |
| | | | debt is a loser's game. |
| Equity is how much of the house you actually | | | | |
| own. In other words, it is the price of your | | | | Please note: If you borrow more than 100 |
| house on today's market minus the amount of | | | | percent of the value of your home, or if the |
| any loans secured on the property. For | | | | home equity loan is more than $100,000.00, |
| example, if your house is worth $170,000 and | | | | some of the interest will not be deductible. |
| your mortgage balance is $115,000, then your | | | | |
| equity is the difference -- $55,000. This | | | | According to Bankrate.com, the worst possible |
| value can go up or down depending on economic | | | | long-term cost of a home equity loan is |
| conditions. | | | | foreclosure. If you cannot afford two |
| | | | mortgages on your house, especially if other |
| You can't sell that portion of the house that | | | | debts pile up again, you can lose your home |
| you own outright. It's a package deal with | | | | to the bank. Defaulting on only one of the |
| the part that you're still paying on. | | | | mortgages can lead to this expensive |
| However, you can get a hold of some of that | | | | conclusion. |
| money through a home equity loan (also known | | | | |
| as a second mortgage). | | | | Contact a reputable Debt Consolidation |
| | | | Company There is little or no cost for the |
| Lately, many of us have experienced an | | | | services. Most of the agencies are called |
| increase in the equity of our homes or condos | | | | Debt Management Credit Counseling Service and |
| because of an unprecedented increase in our | | | | they: |
| home values. This is mostly fueled by the | | | | |
| abnormally low interest rates. These low | | | | - Work with lenders to negotiate a repayment |
| interest rates created a home buying frenzy | | | | schedule you can afford -- including making |
| since the monthly cost of ownership was so | | | | efforts to get finance charges reduced or |
| cheap. For the past year though, interest | | | | waived. |
| rates have been steadily climbing and the | | | | |
| monthly cost of home ownership has been | | | | - Develop a payment plan you can afford. |
| steadily increasing making it more difficult | | | | |
| to purchase a home. This has resulted in a | | | | -Help you re-establish credit when your |
| glut of homes on the market for sale. | | | | current debts are paid off. |
| Remember the old supply and demand theory? | | | | |
| More supply than demand for homes means the | | | | If you participate in a Debt Management |
| price of homes will fall and so will the | | | | Program (DMP) program, it will show up on |
| amount of equity in the home. | | | | your credit report. However, your credit is |
| | | | already blemished, your financial life is a |
| Using our initial example, if you went to the | | | | mess, and you need to take drastic measures |
| bank and took a home equity loan for the | | | | to get back on track. Since the bankruptcy |
| $55,000 to pay off your credit cards, you | | | | laws have recently changed, the bankruptcy |
| have now secured all of this (unsecured) debt | | | | option may no longer be an option. |
| to your home. Taking this one step further, | | | | |
| as interest rates go up, your home could go | | | | Copyright 2006 Debt Management Credit |
| down. So, in theory you could owe more than | | | | Counseling Corp. |
| the actual value of your home. This means if | | | | |