Should You Borrow From Peter to Pay Paul? Not When Peter Is Your Home

Published Wednesday, June 17, 2009 @ 12:39 pm

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No doubt about it: Times are tough.  You, like so many others, may be looking to grab onto any life-line you’ve got. For many of us, the only major investment we have is our home, so it’s not only a natural place to start, it might look like the only tool in the arsenal. Refinancing a mortgage can serve to staunch the flow in a pinch, or at least, put a band-aid on it; a home equity loan can seem like a downright life-saver when times are tough on your wallet. If you’re feeling a little panicky, it’s a good idea to take a deep breath and have a reality check. Before jumping out of the frying pan, take a look around and make sure you’re not jumping into the fire.

Refinancing seems like a great idea because ostensibly you’re not changing anything about your home ownership situation except for your interest rates. But keep in mind two factors: First, unless interest rates have gone down two full percentage points, you probably won’t save much more than what will get eaten up by closing costs and other fees. Second, make sure you keep an eye on the new terms, particularly if they involve a variable interest rate. These can save you some money early on, but will hit you hard in later years; remember that when it comes to long term investments like your home, the big picture often matters more than immediate relief.

And speaking of immediate relief, many of us are encouraged to solve one instant-gratification problem, namely, credit card bills, by taking on another, in the form of a home equity loan. Before you jump on one of these loans, put the situation into perspective. A home equity loan doesn’t reduce the amount you owe, and it can have some serious repercussions. Lenders urging you to borrow against the equity you’ve built up in your home will point out that unlike credit card debt, home mortgage interest is tax deductible. Lenders will tell you that converting credit card debt by taking out a home equity loan will result in a single, convenient payment, probably lower than what you’re paying on your credit cards, with a lower interest rate. These things might be true, but will they really spell out a long term solution? Home equity loans may have lower interest rates than some credit cards, but these rates are nowhere near those of conventional mortgages. Will the payments really be easier to handle? If you can’t keep up with your credit card payments now, it’s unlikely that you’ll have an easier time making the one BIG payment each month for the home equity loan. What’s more, you will probably end up incurring loan fees and other costs, especially if you end up having to pay fees like pre-payment penalties on your current mortgage or broker’s fees.

Even scarier, if you pay back all your credit cards but end up having to declare bankruptcy anyway, a home equity loan means you’ve converted unsecured debt into secured debt; that means you now have a lien on your property that won’t go away through bankruptcy. Are you really ready to give up the protection bankruptcy can afford you down the line? Make no mistake, home equity loans are all too often more trouble than they’re worth.  Before taking on one of these loans, consult a bankruptcy lawyer. Bankruptcy, unlike home equity loans, can be a true life-line.

From: The Law Offices of John T. Orcutt, with convenient office locations in Raleigh, Durham, Fayetteville, and Wilson. Call (toll free) 1-800-899-1414, to set up a free, confidential debt consultation. Visit www.billsbills.com for more information.

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