Paying off credit cards with home equity loans has pluses, minuses
When facing mounting credit card balances, taking out a home equity line of credit can sometimes allow borrowers to get back on solid financial ground while paying lower interest on their debt.
However, financial experts warn it is not the best option for everyone.
Transferring debt to a home equity loan, which typically has much lower interest rates than credit cards, can help consumers pay off their credit cards more easily, according to Bill Hardekopf, CEO of LowCards.com, a Web site that ranks credit cards and lets consumers compare various cards based on interest rates, annual fees and other criteria.
Depending on their credit status, the loans could let consumers borrow 75 to 85 percent of the appraised value of their homes, he said.
"In the right situation, a home equity line of credit can be a good option for reducing credit card debt," he said, but the loan comes with its own risks and may not be the best fit for everyone.
"The first thing you should do is review your past experiences with debt," he said. "If you chronically have problems paying down your credit card balance, going over the limit, managing your debt, or continuing to add to your balance, then a (home equity loan) may be much more harmful than good for you."
According to Hardekopf, the advantages of a home equity line of credit are:
It converts debt from a high-interest credit card to a loan with a lower interest rate.
Consolidating credit cards into a single home equity loan shows fewer outstanding loans on consumers' credit reports.
Depending on the circumstances, borrowers may be able to deduct the interest for taxes because the debt is secured by their home.
But the loans also pose risks, putting borrowers' homes on the line, said Diane Mull, education specialist at Consumer Credit Counseling Service of Southern New England in Milford.
"Certainly, it's not the ideal way to handle debt," she said. Transferring debt from credit cards to home equity may tempt borrowers to begin using those paid-off credit cards again. "It opens the door to increasing all of those balances on the cards again."
Defaulting on a home equity line of credit could have a catastrophic effect on homeowners, Mull said. "It could put your home in jeopardy because your line of credit is secured by your home."
Hardekopf agrees that home equity lines of credit can be detrimental to some borrowers. Among their risks, he said:
Home equity credit is still a debt that must be paid off, and should be viewed as a one-time fix. Consumers who don't have the discipline to stop using their credit cards should not take out home equity loans because if they get into deeper financial trouble, they are putting their homes at risk.
The loan is based on a home's value, which is variable. Borrowers should not assume that the value of their home will never drop. If the value of a home drops, so does the equity.
As with a mortgage, there are fees and paperwork for a home equity loan. They include property appraisal, application fees and closing costs, including attorney fees, title searches and mortgage preparation.
The loan should not be used to live beyond one's means, or to purchase travel or leisure products. Use it only for expenses with long-lasting benefits, such as education, home improvements or debt reduction.
In most cases, there are penalties to paying off the loan early, so those who plan to move from their house in less than five years should seek another option.
Shifting debt from one source to another does not alleviate the central financial problem, Mull said. A better strategy is for consumers to determine how much debt they really have and then devise a plan to address it, she said, and a key component to that often is setting and living within a budget.
"They have to have their spending under control," she said.
By ; Cara Baruzzi, Register Staff
Via : www.nhregister.com
However, financial experts warn it is not the best option for everyone.
Transferring debt to a home equity loan, which typically has much lower interest rates than credit cards, can help consumers pay off their credit cards more easily, according to Bill Hardekopf, CEO of LowCards.com, a Web site that ranks credit cards and lets consumers compare various cards based on interest rates, annual fees and other criteria.
Depending on their credit status, the loans could let consumers borrow 75 to 85 percent of the appraised value of their homes, he said.
"In the right situation, a home equity line of credit can be a good option for reducing credit card debt," he said, but the loan comes with its own risks and may not be the best fit for everyone.
"The first thing you should do is review your past experiences with debt," he said. "If you chronically have problems paying down your credit card balance, going over the limit, managing your debt, or continuing to add to your balance, then a (home equity loan) may be much more harmful than good for you."
According to Hardekopf, the advantages of a home equity line of credit are:
It converts debt from a high-interest credit card to a loan with a lower interest rate.
Consolidating credit cards into a single home equity loan shows fewer outstanding loans on consumers' credit reports.
Depending on the circumstances, borrowers may be able to deduct the interest for taxes because the debt is secured by their home.
But the loans also pose risks, putting borrowers' homes on the line, said Diane Mull, education specialist at Consumer Credit Counseling Service of Southern New England in Milford.
"Certainly, it's not the ideal way to handle debt," she said. Transferring debt from credit cards to home equity may tempt borrowers to begin using those paid-off credit cards again. "It opens the door to increasing all of those balances on the cards again."
Defaulting on a home equity line of credit could have a catastrophic effect on homeowners, Mull said. "It could put your home in jeopardy because your line of credit is secured by your home."
Hardekopf agrees that home equity lines of credit can be detrimental to some borrowers. Among their risks, he said:
Home equity credit is still a debt that must be paid off, and should be viewed as a one-time fix. Consumers who don't have the discipline to stop using their credit cards should not take out home equity loans because if they get into deeper financial trouble, they are putting their homes at risk.
The loan is based on a home's value, which is variable. Borrowers should not assume that the value of their home will never drop. If the value of a home drops, so does the equity.
As with a mortgage, there are fees and paperwork for a home equity loan. They include property appraisal, application fees and closing costs, including attorney fees, title searches and mortgage preparation.
The loan should not be used to live beyond one's means, or to purchase travel or leisure products. Use it only for expenses with long-lasting benefits, such as education, home improvements or debt reduction.
In most cases, there are penalties to paying off the loan early, so those who plan to move from their house in less than five years should seek another option.
Shifting debt from one source to another does not alleviate the central financial problem, Mull said. A better strategy is for consumers to determine how much debt they really have and then devise a plan to address it, she said, and a key component to that often is setting and living within a budget.
"They have to have their spending under control," she said.
By ; Cara Baruzzi, Register Staff
Via : www.nhregister.com
posted by auto at 5:02 AM
0 Comments:
Post a Comment
<< Home