Home Equity loans; don't put your Home or Condo at risk!!
Written by: Pete Glocker
Debt Consolidation may be a better alternative
Have you seen those bank and mortgage ads on TV and newspapers
telling you to pay off those pesky high interest credit card
bills by tapping into the equity of your home? They make it
sound real simple, apply on-line, call-us toll free, answers
within hours, etc. They almost sound too good to be true. We all
know about the dangers of things that are too good to be true.
So, what are the dangers of using your equity to pay off your
credit card debt? A minor detail they forget to mention in those
ads; while banks frequently advertise home equity loans as a way
to consolidate other high-interest debt, these loans don't wipe
the slate clean. You still owe the money, and now it's linked to
your homeownership. Before we start, let's understand some
important financial terms: Unsecured debt is not guaranteed by
the pledge of collateral. Most credit cards are an example of
unsecured debt, which is why their interest rates are higher
than other forms of lending, such as mortgages, which employ
property as collateral.
Secured debt is secured by a lien on debtor's property which may
be taken by the creditor in case of nonpayment by the debtor. A
common example is a mortgage loan.
Equity is how much of the house you actually own. In other
words, it is the price of your house on today's market minus the
amount of any loans secured on the property. For example, if
your house is worth $170,000 and your mortgage balance is
$115,000, then your equity is the difference -- $55,000. This
value can go up or down depending on economic conditions.
You can't sell that portion of the house that you own outright.
It's a package deal with the part that you're still paying on.
However, you can get a hold of some of that money through a home
equity loan(also known as a second mortgage).
Lately, many of us have experienced an increase in the equity of
our homes or condos because of an unprecedented increase in our
home values. This is mostly fueled by the abnormally low
interest rates. These low interest rates created a home buying
frenzy since the monthly cost of ownership was so cheap. For the
past year though, interest rates have been steadily climbing and
the monthly cost of home ownership has been steadily increasing
making it more difficult to purchase a home. This has resulted
in a glut of homes on the market for sale. Remember the old
supply and demand theory? More supply than demand for homes
means the price of homes will fall and so will the amount of
equity in the home.
Using our initial example, if you went to the bank and took a
home equity loan for the $55,000 to pay off your credit cards,
you have now secured all of this (unsecured) debt to your home.
Taking this one step further, as interest rates go up, your home
could go down. So, in theory you could owe more than the actual
value of your home. This means if you wanted to sell your home
and it was now worth $150,000 you would have to come up with an
extra $20,000 just to be able to satisfy your financial
obligation. In 1988, homes throughout the country were at their
highest value. Then in 1989, due to economic conditions, many
companies had laid off employees and the housing bubble burst
causing homes in some parts of the country a loss of up to 50
percent of their value overnight! There is no reason why this
could not happen again. This is not a healthy scenario.
The good news about equity loans is that they have lower
interest rates than credit cards because they are secured
against your house. The bad news is these loans are secured
against your house. If you miss a payment then you risk losing
your home. Miss a credit card payment by itself and initially
you will only have to listen to debt collectors, but you will
still have your home.
The disadvantages of using a home equity loan to pay off your
* By pulling money (equity) out of your home to feed your
spending habits, you may end up homeless.
* If you use your home to pay off credit card debt you lose your
* Taking out more debt to pay off current debt is a loser's
game. Please note: If you borrow more than 100 percent of the
value of your home, or if the home equity loan is more than
$100,000.00, some of the interest will not be deductible.
According to Bankrate.com, the worst possible long-term cost of
a home equity loan is foreclosure. If you cannot afford two
mortgages on your house, especially if other debts pile up
again, you can lose your home to the bank. Defaulting on only
one of the mortgages can lead to this expensive conclusion.
Contact a reputable Debt Consolidation Company
There is little or no cost for the services. Most of the
agencies are called Debt Management Credit Counseling Service
* Work with lenders to negotiate a repayment schedule you can
afford -- including making efforts to get finance charges
reduced or waived.
* Develop a payment plan you can afford.
* Help you re-establish credit when your current debts are paid
If you participate in a Debt Management Program (DMP) program,
it will show up on your credit report. However, your credit is
already blemished, your financial life is a mess, and you need
to take drastic measures to get back on track. Since the
bankruptcy laws have recently changed, the bankruptcy option may
no longer be an option.
About the author:
Pete Glocker is employed in the Education and Charitable
Services Department at Debt Management Credit Counseling Corp.
("DMCC"), a 501c(3) non-profit charitable organization located
in Boca Raton, Florida. DMCC financial counselors can be reached
for free education materials, budget counseling and debt
management plan quotes by calling 800-863-9011 or by visiting
www.dmcccorp.org. Pete Glocker can be reached by email at p
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