subject: When Is Home Equity Debt Consolidation For You? [print this page] For people with a great deal of unsecured debt and a fair amount of equity (assessed value in excess of the debt amount) built up in their house, home equity debt consolidation is an attractive proposition. However, for some this process results in getting even farther behind. Those who cannot have an empty credit card without filling it up will not benefit from a debt roll-over.
A home equity loan is usually low-interest and serves as a second mortgage against the house that is put up as security. The advantages are many, especially in tax savings, but the consequences can be detrimental as well to those who do not manage money well.
Interest on home loans is tax-deductible in the year it is paid, whereas interest you have paid on credit cards and store charge accounts is not (unless it is business-related). The tax advantages added to the lower interest rates and the longer payment terms make it far easier to pay the debt off. The minimum monthly payment on a second mortgage that incorporates many small accounts will be much smaller than you would be paying on the individual bills.
Your house is probably your largest asset and the one that produces the most stability for you and your family. Taking out a second mortgage on this asset increases the danger of losing it to foreclosure or in bankruptcy. This concern used to be fairly remote when the job market was strong and the stock market a good place to invest, but today many people have been faced with the reality of losing their home when they cannot keep up the payments.
This is a step that only makes sense if two things are established. First, the amount of unsecured debt should be quite high. There will be fees to pay, as in any refinancing, and this increase in the total debt must be small compared to the benefits that will result from the transaction.
Experts say that all store accounts (usually carrying very high interest rates) should be closed and credit cards cut up so they may not be used for incurring new debt. You may want to keep those accounts open but they should be off-limits until the debt they helped you run up is gone. By then, hopefully you will be devoted to living on a cash basis.
With a comprehensive budget and a sincere desire to get rid of obligations, you may find a roll-over of consumer debt to be good policy. With a lower monthly payment that is more principal than interest (and you can pay extra if necessary to make it so), you will make fast progress toward your goal of being debt-free. Moreover, if you do miss a payment or make it late, you have only one late fee and one mark against your credit.
The question really is: Is home equity debt consolidation wise for you? If you use it as part of a total debt reduction program and resist the daily temptation to spend on credit, than it should be a very good strategy.
