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Debt help by tapping into your house - is that a good practice
After recent debt help and debt relief related posts in which we advocate using home equity to pay off an unsecured high interest debt, several readers questioned our sanity. This one is the most expressive on the debt relief disagreement:
Q: I don't understand why you pushing debt help by means of digging into your house. Simply insane. You are changing unsecured debt on secured debt with collateral. Something that can and will be taken from you if you get into debt again. Read this Suze Orman's 12 Biggest Money Mistakes, before pushing your dubious debt relief ideas. You are trying to get more mortgage business?
A: We don't' agree with Suze Orman on the debt point as well as few others, notably the 401k borrowing, the interest only financing on home mortgage and on Roth IRA. We will revisit 401k borrowing for sure in further posts, because 401k can be a great source for debt relief. We also leave mortgage business nonsense. Now to the question of using home equity loan.
The biggest fear Suze plays on and we quote her is "This is a move that can end up costing you your home. Your credit-card debt is what's known as unsecured debt: There's no collateral the credit-card issuer can force you to sell to collect on your debt. A HELOC-like a mortgage and a home-equity loan is what's known as secured debt. .. If you fall far enough behind on your HELOC payments, the lender can require you to sell the home to recoup the money you borrowed. .. Besides, many people wipe out their credit-card debt by rolling it over into a HELOC -- and then run up new credit-card balances again. This puts them in a big fix: They have credit-card and HELOC debt."
Scary, isn't it, you want to get some money to help with debt, you end up with more debt and no relief in sight. She is absolutely right, but this is like saying that you can't eat salmon because it has mercury and you shouldn't own a car since it is depreciates quickly and you will get into accident. What about omega fats and a simple fact that not all have and want to take public transportation? What about hunting, and even boat fishing? Your boat can go under, you know.
Yes, you are putting your house as a collateral, but you become debt free, hopefully. To stay away from getting into debt again is a common sense. We think that our readers have some at least. We don't ask you to use the house as the ATM machine. It will run out of cash, in this case, out of equity, and mortgage payments will get higher and higher. So debt relief or help by the means of your home equity is one time deal.
What is the alternative? You get most definitely much lower debt and tax breaks. The only alternative is not to get into debt or have rich relatives. Suze doesn't say what you should do to get any debt relief. Should you enroll into debt management program or go for credit counseling nightmare. Better yet, call AmeriDebt, just kidding of course.
The other point made is, and we quote again, "You also need to be doubly careful with HELOCs in today's rising-interest-rate environment. In 2005 the average HELOC rate jumped from 5.62 percent to 7.25 percent. On a $25,000 HELOC balance with a 15 year payback period, the monthly payment would have jumped from $206 to $228. That's an extra $250 for the year."
That's an extra tax deductible $250 for you for entire year. By the way, we haven't seen too many HELOCs with "15 year payback period". Most has 10 years, so the jump will be from $272.80 to $293.50. Still much better than payments on $25,000 in credit card debt or high interest car loan, isn't it. And if you worry about rising HELOC rates, which firmly tied to the prime rate which Mr. Bernanke may still be raising higher, get a fixed cash-out refinance mortgage on your house. Or a long term, say 5 or 7 year ARM.
Use your head while seeking debt relief solutions. Don't buy into any advice, including ours without looking into your particular situation very carefully.
Here are some more resources on
credit counseling, debt settlement, debt negotiation and debt reduction.
creditpro on Feb 22 in Debt Relief | Permalink
