Home equity loan to pay off CC debt? (1 Viewer)

[Jared_B]

Here's the problem:

My wife and I have some extra debt on a few credit cards. We were planning to have them all paid off by 2002, but with funds being tight that didn't happen. So now we have a plan for paying them off. We know what we can pay, and we know how long it will take us (summer, '02). You could say it's our New Year's resolution to pay off our debt.

We are looking into getting a home equity loan to pay them off, then paying monthly towards that. It would save us money in interest, as the rate on the equity loan is much lower. Are there any drawbacks to doing this?

The other part of our plan is cutting up our cards!!

 

[MickeS]

"Are there any drawbacks to doing this? "

No.

/Mike

 

[Ryan Wright]

"Are there any drawbacks to doing this? "

No.

Yes, there is. You are trading unsecured debt for secured debt. If you don't make the payments on your credit cards, they can cancel your accounts and screw up your credit. If you don't make the payments on your home equity loan, they foreclose on your house and kick you out onto the street.

How much money are we talking here, and how long is it going to take you to pay back? If you lost your job tomorrow, would you still be able to make the payments? These are things to think about. And, sometimes, people do this only to run up more debt on new credit cards. Then you're really screwed.

Forgot to add, is the interest on such a loan tax deductable like a mortgage? If so, that is a strong benefit in favor of the home equity loan.

 

[Patrick_S]

If you are now disciplined enough to make the monthly payments and not run up more debt on your CCs the Home equity loan is the way to go.

1. As you have already stated the interest rate is lower.

2. Generally the interest on a home equity is tax deductible.

Do not do the HEL if you can't control your spending. It would be in your best interests to cut up the cards if you think you might slip into bad spending habits.

 

[Jared_B]

The interest is tax deductable, another plus. We should be able to pay it all off within 6-9 months.

Another option: We have more than enough money in stocks to pay off the cards, but we would take a hit if we sold them (who wouldn't). But again, that would count as capitol loss on our taxes. What do you guys think, which option is better?

 

[MickeS]

Ryan, I agree with that, however it didn't seem like a concern, since I understood the payback period to be very short. In that case the HEL would have to be paid pack again with the credit cards, and he'd be back where he started. It didn't seem like a drawback really worth considering to me.
However, if that's a problem, there are always the "introductory transfer rate 0%" offers, and if he can get in on those deals and transfer all the debt over to one card and pay it off within the 0% period, that's even better. But that's not the topic though.
/Mike

 

[Kevin T]

i play the balance transfer game like mike noted. i have 4 different platinum cards and at any given time, one of them is offering a 0% interest balance transfer for 6-9 months. i've been doing this for about 2 years and now have paid down the debt to just two months from being in the clear. of course, i could have paid it off faster but this damn hobby keeps me in the poor house...
kevin t

 

[Paul O]

A Home Equity will have some closing costs associated with it - Be wary of deals which require no money up front but increase the size of your mortgage payoff. There are some good zero cost loans which offer rates around prime but they usually involve a penalty fee if the Loan is closed (for example if you sold your house). If you can pay off your Credit Card debt in 6-9 months as it is, it may make more sense to consolidate them to a lower interest card since there are no up front loan costs and no risk to your home should you not be able to make the payments.

 

[Todd Hochard]

I think that you should leave the Home Equity alone, as it was harder to gain than your CC balance was. I think you should leave the stocks alone, as they were harder to gain than your CC balance was. There will always be a reason to delay putting that money back. After all, there was a "reason" to spend beyond your means that got you here.

Do the balance transfer thing, and pay them off quick, as your penance for running them up in the first place. Cut them up, save one for REAL emergencies, and start buying things with money you've already actually EARNED.

This is the sort of hard-assed declaration I made for myself years ago. It worked- I no longer loathe losing my job, even though I have a daughter, and I am the sole income for my family. Something to think about.

Todd

 

[Deane Johnson]

I would never suggest trading unsecured debt for secured. Like Ryan said earlier, they can take your house if you default. These days, there are credit card deals that get the interest low enough that the difference in interest rates isn't worth the risk.

What if you should get sick and couldn't work. Would you rather have the credit card companies bugging you or would you rather have the mortgage company outside asking for your keys.

Deane

 

[Mark Zimmer]

Although speaking as someone who has done mortgage foreclosures, if the HEL is from a different lender than the primary loan, they will be very, very loathe to foreclose. Why? Because they're still in second position and then it's THEIR obligation to pay the first mortgage or they're wiped clean and come away with zippo. They will be eager to work with you if there is a problem. 2nd and 3d mortgage lending is incredibly risky for the lender unless you have huge equity (and most people in this situation don't). That really shouldn't enter into the discussion at all.

I don't see any cc offers other than balance transfers that have rates lower than what's available on the HEL market. Furthermore, if you are doing the balance transfer gig repeatedly, you've just screwed up your own credit rating, because one of the things lenders look at is how many credit inquiries have been made; each transfer is at least one inquiry, and those all add up against you. Once is safe; twice in one year is starting to push it.

The only down side of the HEL (especially with the tax writeoff) to my mind is the closing costs. That is, if you REALLY CUT UP THE CARDS. Otherwise, you're just digging the hole deeper. Keep a gas card for trips. Maybe another with a low ($500 or less) balance solely for use during travel.

 

[Jared_B]

Thanks, guys.

I have come to a decision.

I will sell some of my stocks (the ones that have done nothing over the last 4 years), and apply the money towards the highest interest card. We will keep with the same payment schedule we came up with, which will allow us to pay off the remaining balance several months early. Also, my refund check looks to be big this year (bases on initial calculations). That should take care of any remaining balances. After the cards are paid, the money previously going towards payment every month will go towards savings and stocks (as it was before).

Since a good part of the debt is from unexpected medical expenses, we are not worried about getting back into debt (we did fine before - balance always paid in full next month).

Jared

 

[Ryan Wright]

Since a good part of the debt is from unexpected medical expenses

This seems to be a recurring trend amongst people I know. 5 years ago when I started work with the company I'm currently at, my insurance didn't kick in until after 6 months of employment. During that 6 months of no health insurance, my wife had to have emergency gallbladder surgery. The bill was over twelve thousand dollars and we spent years paying it off. :frowning:

 

[Philip Hamm]

If you can pay the cards off the best way to do so is a "1.9% on balance transfers" credit card you get in the mail. Or if it's 0% that's even better. As long as you pay it off and dont' spend money.

 

[Ashley Seymour]

I have to strongly agree with everyone who counceled against the home equity loan and for the variety of reasons laid out.

I worked as a bank loan officer for 12 years and have sold real estate for the last 12 years. No matter how good it looks on paper to reduce the interest rate and to have the tax deductible feature "stuff" can happen and you now have less equity in your home the credit card bills are going up again.

Before I left my bank they offered a line of credit with a wild deed on the borrowers residence to give the interest deductible option. I don't know how they function now, but the lines were basically approved on the basis of the borrower qualifying unsecured. Though I see some benefits to this program, it still ties you up if you have to move and that deed has to get paid off when the house sells.

Suck it up and hammer down the cc. Too bad you had to sell the stock. I think in a year you will have second thoughts on that decision.

 

[Christoph]

Before you do anything drastic like a home equity or consolidation loan, why not call your credit card companies and see if a lower rate is available on your existing accounts?

Just call up the customer service number, listen to the voice prompts and figure out what to press to talk to an actual rep, then say something like: "I was reviewing my account and noticed that my interest rate isn't very competitive with other offers I'm receiving. Do you have any programs that would offer me a lower rate?"

Be polite, and flexible in what you'll do to get a rate. You may have to transfer a balance from another card to get a better rate on your entire balance, or even apply for a new account on a different program with the same bank.

At the moment, both Chase and Citibank (and others, I'm sure) have "0% for 9 months" offers available, which would presumably beat the rate on your home equity loan.

 

[DarrinH]

Two words:
Dave Ramsey
http://www.daveramsey.com/radio/indexA.cfm
Give him a listen.
http://www.daveramsey.com/
Here is the main page. He will change your life.

 

[nolesrule]

I have to agree with Christoph. Just ask them to lower your APR.

I call up my credit card companies twice a year and play them all against each other. I usually manage to knock the APR down each time. I had a couple cards that I got in college that were up around the 20% area (it's easy to get credit cards while in college, but rates are always high). Now I don't have a single card that is over 11.9%.

 

[Travis Hedger]

Why is it then when I call, their system is either updating and they cant access my records or they refuse to offer a lower rate?

I have one with NextCard visa, they had banner ads all over the place claiming 9.9% fixed but set me up @ 16.99. My mother also got the same treatment but when she called up they lowered her to 9.9 yet they refuse to do so with me.

They said bullshit stuff like the number of other cards you have affect the rate, which I interpret that they are making it harder to pay off by having such a high rate in the first place which is higher than what was advertised.