Home Equity Debt: The Slippery Slope
By Kelly Richardson
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A home equity line of credit or fixed rate second mortgage can be a great way to consolidate high interest credit cards and finance that home improvement project you've been putting off. However, taking on long term debt to solve a short term problem may not be the best option.
Home equity debt is not to be taken on lightly. While it can be an expedient way to offload credit card debt and lower payments, finance a new car or luxury vacation, or get that super-mega plasma TV, you need to keep in mind that you are taking on long term debt secured by your home. Long after the vacation is over, the car has been traded in, and the plasma TV is obsolete, you'll be paying that mortgage.
Smart Home Equity Borrowing
Contact several lenders and ask question about their home equity offerings. They'll be able to explain to you in detail the best options for you. Sensible borrowing should always be first and foremost in your mind.
- » Don't borrow more than you need. Your lender will qualify you based on your income, debts, credit, and the worth of your home. If you only need $40,000 don't borrow $80,000 just because the lender says you can.
- » Look toward the future. If you are in a line of work that requires frequent transfers, or see yourself having to sell your home in the near future, consider that a high debt load on your home means less flexibility in your asking price if you have to sell. If you are considering home improvements in order to sell your house, limit it to cosmetic upgrades and smaller projects that historically pay off better. Many home improvements do not return more in added value than they cost.
- » Change your lifestyle. If you take that second mortgage to consolidate credit card debt, stash your credit cards away and start living within your means. Keep in mind that 80% of homeowners who refinance credit card debt run it back up. They lose the equity in their home and end up worse off, risking bankruptcy and foreclosure. Be one of the smart 20% and get your financial house in order.
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About the Author
Kelly Richardson covers the real estate scene in major cities across the country. His articles appear in educational journals, periodicals, and e-zines.