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