When the burden of debt becomes unbearable, you search for all options to get rid of it. One tempting option is using your home equity. It’s simple and easy. Your credit card debt will melt in no time. But remember, it is a double edged weapon.
You may buy your first home in the beginning of your career. You make your mortgage payments promptly. Real estate market also moves up gradually. Over a few years, you build up a good margin over your mortgage. That is your money and you will require it for buying a bigger house or for moving to a posh locality. This is an investment for your retirement also.
However, over the number of years your habits may change. You may go on spending a lot with the help of those ‘powerful’ credit cards. But in the periods of downturn, these credit cards are hard to maintain. With higher interest rates, unreasonable fees and penalties you end up with huge balances on your credit cards. Your income is unable to cope up with re-payments.
There are companies offering instant solutions to get rid of such situation. Their solution is – take loan against your home equity and pay off the entire debt.
You can take such a loan in two ways – either use a home equity line of credit (HELOC) or use a home equity loan (HEL). Both these loans are easy to get if you have built up a good equity over the years. However, you should take such a decision only after weighing major risks.
1. This loan is against your home. If you are unable to pay it off in time, there is a risk of losing your home. You will be quickly spending the loan amount towards discharging debt but if your spending habits continue, you may create further credit card debts in a short time.
2. Consider the market price of your home. If the real estate market is falling, the value of your home may go down and finally your mortgage plus home equity loan may exceed the value of the house. This is a trap of bankruptcy.
3. Your monthly payments on home equity loan will be lower than the payments for your credit card dues. However, the repayment period may be longer and you will have to make the monthly payments regularly all the time.
4. Determine the exact amount outstanding on your credit card. If you are taking your home equity loan, take only the minimum required. If you are planning to take the home equity line of credit, be very careful while spending that money. You may be tempted to use this money for spending further! That will be a very dangerous move.
You should always remember that this loan is second mortgage. It is backed by the security of your home. If you make any defaults, there is a risk of losing your home. Moving from your own home to a rented apartment is never a good idea.
By: Chintamani Abhyankar