Should a home-equity loan be used to pay off credit-card debt or loans?
Walter L. Koon Jr.
Koon Financial Planning & Consulting
In some cases a home-equity loan, also known as a second mortgage, offers a way to lower your interest cost and to spread out your payments.
Interest rates for a home-equity loan may be less than half of the rates charged by credit-card companies. Lowering the interest cost on your debt can be a factor in paying the loan off sooner.
To qualify for a home-equity loan, you must own or be buying your home, have a satisfactory credit record and have sufficient income to make the payments.
Borrowing money against your biggest asset to "pay" credit cards really isn't paying off anything, just exchanging debt for debt. If you are not willing to quit adding to your debt burden by giving up your credit cards, you may find yourself with big credit-card bills and no equity in your home.
Here are some things to keep in mind:
• Know if the rate will be fixed or variable.
• Credit insurance, if required, may increase the loan's total cost.
• A line of credit offers flexibility to pay more or less, but also can lure you into borrowing even more.
• Watch for additional fees and charges.
• Establish a maximum amount that preserves some equity in your home.
Ed Snyder
Oaktree Financial Advisors
Definitely maybe.
Conventional wisdom would tell us yes because the interest is deductible from your taxes. But interest rates on home-equity loans have risen in the last couple years and competition in the credit-card business has heated up, so it's not difficult to find credit-card offers on balance transfers with low interest rates for the life of the balance.
So if you run the numbers with a lower credit-card interest rate, you may save more money even without the tax benefit of the home-equity loan.
You need to do your homework and make sure the interest rate is locked in for the life of the balance. Beware the zero percent interest introductory offers. They're often only good for 12 months and then jump to 18 percent or more.
Also, don't forget to factor in the balance transfer fee. A lot of cards will cap it at $75, but make sure first. And if you do transfer balances to a lower-interest credit card, cut up the new card and don't put any new purchases on it.
No matter what you do, it doesn't correct the behavior that got you into this situation.
If you move the debt to a home-equity loan or transfer it to a new card, it leaves your original credit-card balance(s) at zero, meaning you can go charge them up again. If you do that, you'll be facing a bigger problem down the road.
Kevin Clasen
West Point Private Client Group
It is common for Americans to turn to their home equity to relieve the stress of debt. Many times this strategy merely puts a Band-Aid on the problem.
The real root of the problem many times is overspending. No amount of juggling of the structure of debt can eliminate the requirement to pay off the debt.
If you do find yourself in a situation where you need to do something, using home equity can be a good option. Most people use their home equity as it has become easier to tap into and it may be tax-deductible.
This can be the Band-Aid you are looking for. But if your spending habits don't change, you most likely will find yourself back at the same place soon.
There are many sources of learning about how to use money -- from self-help materials, financial advisers, and even churches.
The resources are endless. However, you just need to make the decision to ask for help.
• Walter L. Koon Jr. is a certified financial planner in Greenwood and Bloomington.
• Kevin Clasen is a certified financial planner.
Via http://www.indystar.com
Koon Financial Planning & Consulting
In some cases a home-equity loan, also known as a second mortgage, offers a way to lower your interest cost and to spread out your payments.
Interest rates for a home-equity loan may be less than half of the rates charged by credit-card companies. Lowering the interest cost on your debt can be a factor in paying the loan off sooner.
To qualify for a home-equity loan, you must own or be buying your home, have a satisfactory credit record and have sufficient income to make the payments.
Borrowing money against your biggest asset to "pay" credit cards really isn't paying off anything, just exchanging debt for debt. If you are not willing to quit adding to your debt burden by giving up your credit cards, you may find yourself with big credit-card bills and no equity in your home.
Here are some things to keep in mind:
• Know if the rate will be fixed or variable.
• Credit insurance, if required, may increase the loan's total cost.
• A line of credit offers flexibility to pay more or less, but also can lure you into borrowing even more.
• Watch for additional fees and charges.
• Establish a maximum amount that preserves some equity in your home.
Ed Snyder
Oaktree Financial Advisors
Definitely maybe.
Conventional wisdom would tell us yes because the interest is deductible from your taxes. But interest rates on home-equity loans have risen in the last couple years and competition in the credit-card business has heated up, so it's not difficult to find credit-card offers on balance transfers with low interest rates for the life of the balance.
So if you run the numbers with a lower credit-card interest rate, you may save more money even without the tax benefit of the home-equity loan.
You need to do your homework and make sure the interest rate is locked in for the life of the balance. Beware the zero percent interest introductory offers. They're often only good for 12 months and then jump to 18 percent or more.
Also, don't forget to factor in the balance transfer fee. A lot of cards will cap it at $75, but make sure first. And if you do transfer balances to a lower-interest credit card, cut up the new card and don't put any new purchases on it.
No matter what you do, it doesn't correct the behavior that got you into this situation.
If you move the debt to a home-equity loan or transfer it to a new card, it leaves your original credit-card balance(s) at zero, meaning you can go charge them up again. If you do that, you'll be facing a bigger problem down the road.
Kevin Clasen
West Point Private Client Group
It is common for Americans to turn to their home equity to relieve the stress of debt. Many times this strategy merely puts a Band-Aid on the problem.
The real root of the problem many times is overspending. No amount of juggling of the structure of debt can eliminate the requirement to pay off the debt.
If you do find yourself in a situation where you need to do something, using home equity can be a good option. Most people use their home equity as it has become easier to tap into and it may be tax-deductible.
This can be the Band-Aid you are looking for. But if your spending habits don't change, you most likely will find yourself back at the same place soon.
There are many sources of learning about how to use money -- from self-help materials, financial advisers, and even churches.
The resources are endless. However, you just need to make the decision to ask for help.
• Walter L. Koon Jr. is a certified financial planner in Greenwood and Bloomington.
• Kevin Clasen is a certified financial planner.
Via http://www.indystar.com
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