Protect Your Home’s Equity

Your greatest investment and largest asset is your home. Why then to millions of home owners fritter away their home’s equity?

Home equity loans are potential financial pitfalls. The foremost danger of these loans to consolidate credit card debt is collateralizing your home. Home ownership can provide security and a stable environment for your family. However, adding unsecured debt to your home jeopardizes its security. Creditors may sue if you fail to repay your credit card debt, but lien holders will take your home if you fail to pay your mortgage.

Dangerous Interest Rates for Home Equity Loans

Teaser interest rates for home equity loans are also extremely dangerous because they dupe home owners into thinking they can afford to refinance their home. When the variable interest rate increases, the home owner is often times already financially stretched and cannot afford the higher monthly payment. If the home owner defaults on their mortgage payments, the lien holders can foreclose on the home. Unfortunately, over 1.2 million homes were foreclosed upon in 2006 and 2007 will most likely top that number.

Home Equity Lines of Credit

Home equity lines of credit (HELOC) are another financial hazard. A home equity line of credit usually works similar to a credit card, only at a lower interest rate. The inherent danger is that ability to fritter away your home’s equity. Even if you pay off your credit cards with the money, you’re only transferring the debt to a longer term debt. The result is you will pay thousands more in interest even with the lower rate because you’re extending the repayment of the debt over 15 to 30 years.

Cash-Out Home Equity Loans

Cash-out home equity loans have become popular in recent years as a quick way for home owners to get cash. A cash-out loan works like this, you owe $100,000 on your current home but you want $15,000 in cash. You can refinance your home for $115,000 and get a check for $15,000. The cash-out loan may offer a lower interest rate but there’s a catch. Typically you pay the bulk of your interest in the beginning of your loan, thus taking another first mortgage on your home means you’ll be paying the initial interest all over again. In the latter years of mortgage payments, the bulk of the payment goes toward the principal and you accumulate more equity in your home. But if you refinance, especially in the latter years of your loan, the majority of your payment will be going toward interest, not equity.

Refinancing your home to alleviate your credit card debt is a poor solution to your problem. Trying to borrow your way out of debt can result in paying thousands of dollars more over a longer period of time. If you struggle with debt and need relief, you need to examine all your options and see which is most beneficial for your situation. Debt settlement may be a viable alternative to home equity loans, debt consolidation. The primary advantage of debt settlement is it can reduce the principal balance of your debt and usually eliminates debt within three years.