Wednesday, July 9, 2014

Is Line of Credit the Right Way to Pay off Debt?

                                            
 Pay Down Debt

A very provocative question is posed below:
   
   Should you use a home equity line to pay off debt?

Yet the discussion that Al Clark's article in HomeAction Newsletter is very good.

Though taking a loan, personal, HELOC, 2nd Mortgage or other, is not a great idea in most instances.  Typically, as touched on in this article,
the discipline to not used the new loan or line of credit as a "piggy bank" is essential.

Yet, establishing a budget and leveraging the difference between the current loan/credit card interest rates and current interest rates can be a very very wise move.

For example, if you have a credit card payment on $10,000 at 18%, you payment would be approx. $2600 monthly if wishing to pay off in one year.  Yet an HELOC interest only loan with 3.75% rate would only cost $375 per month.  Thus, you pay $1200 per month and the loan is paid off in a year.

You save $1680!!!  

Yet, this savings would be lost if you never reduced the principal and simply paid interest for the 10 years of the HELOC loan.

Yet, saving $1680 in a single year and being out of debt(or having extra funds to pay off other debt...the average family has over $40,000 in credit card debt!!).

Thus, ensure you have a plan prior to taking any loan.  All loans come with a price, interest and a lost of property(if payment not made).   

No one wants to lose a house for the sake of a spending spree on some vacation!!

Have questions?  Wonder how to make this work so that you can pay down loans or set your financial house in order to move to that new place?

Call me at 757 580-6546 or email me at bcerny@roseandwomble.com

Got input or success story?  Please share!!!



SHOULD YOU USE A HOME EQUITY LINE TOPAY OFF DEBT?

Home Equity Loan Pros And Cons

Should you use a home equity line or loan to pay off your outstanding credit card bills or other debt? Maybe. But before you borrow, consider the pros and cons.

There are two kinds of home equity mortgages. With a home equity loan you get a set amount all at once. With a home equity line, you get access to line of credit that you can spend as you need it.

Loans and lines are secured by the equity in your home (that's the difference between what you owe on your first mortgage and what your home is worth). If you fail to make your monthly payments, your lender can foreclose on your home.

Many homeowners will take out a HELOC (home equity line of credit) to finance home improvements, to purchase a vehicle or to pay off debts.

Because the interest you pay on a home equity loan may be tax deductible, a home equity line can be a relatively inexpensive way to borrow money.

Suppose you have a $10,000 debt. You're offered a HELOC for $10,000 at 5 percent interest or you can pay the debt with a credit card that charges 12 percent interest.

The advantage to using the HELOC instead of the credit card is clear. You pay less for the HELOC because the interest rate is 7 percent  lower.

But, like any loan, it's important to remember that a home equity loan is just that - a loan, or debt guaranteed by your home. Your lender will likely let you stretch out repayment over 10 years or more and you'll be paying interest that whole time.

If one of your major problems is that you spend beyond your means, a HELOC may help you overspend. As a result, a home equity loan may actually make your fundamental problem worse, rather than better.

But, if you have made a commitment to control your debt and are seeking ways to reduce your overall expenses, a home equity loan can be a sensible solution.

One essential exercise is to actually calculate how much money you would be spending per month - and over the life of the debt - in one scenario versus the other. There are debt calculators readily available online to help you do just that. 
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