Welcome to the “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.
Today’s question is about debt; specifically, whether it’s a good idea to use a home equity loan to pay off credit cards and other bills.
Watch the following video and you’ll pick up some valuable info. Or, if you prefer, scroll down to read the full transcript and find out what I said.
You also can learn how to send in a question of your own below.
For more information, check out “8 Guaranteed Ways to Get Rid of Debt Fast” and “Ready to Tackle Your Debt? 12 Tips to Find Free or Cheap Help.” You can also go to the search at the top of this page, put in the word “debt” and find plenty of information on just about everything relating to this topic.
Got a question of your own to ask? Scroll down past the transcript.
Don’t want to watch? Here’s what I said in the video
Welcome to the “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this two-minute answer is brought to you by MoneyTalksNews.com, serving up the best in personal finance news and advice since 1991.
Let’s get to today’s question. It’s from “Anonymous”:
Currently, we have $24,000 in credit card debt and $38,000 in car debt. Should we use our home equity to pay our bills since rates are so low? My husband’s afraid to do anything.
You know what, Anonymous? I’m a little afraid for you too. Why do you have so much credit card debt?
I’ve got three things for you:
Thing No. 1: Ways to borrow against your home
There are two ways to borrow against your home equity. The first is a home equity loan, which is essentially a second mortgage. As with your first mortgage, you’re borrowing a fixed amount of money, then making a fixed payment monthly at a fixed interest rate. When you make the last payment, the debt is paid off and the loan is over.
Another option is a home equity line of credit, also known as a HELOC. This type of loan is more like a credit card. You’re borrowing as little or as much as you want, up to your approved limit, then paying it back over time. As with a credit card, the interest rate can change, you’re only paying interest on the amount you’ve borrowed and it ends whenever you choose to close it.
Which is best? It depends on whether you need a flexible line of credit or a big lump sum, as well as other factors like how long you’ll need to pay it back and whether interest rates are rising or falling.
Thing No. 2: ‘Buy a blouse, lose a house’
There’s an old expression in the credit-counseling industry: “Buy a blouse, lose a house.” It refers to the fact that home equity loans are secured by the roof over your head.
When you’ve got credit card debt, it’s unsecured. In other words, there’s very little a credit card company can do to squeeze that money out of you. Granted, the company can sue you, but you can file bankruptcy and theoretically avoid paying the debt.
On the other hand, when you secure a debt with your house, you’re betting the roof over your head that you’ll be able to pay that money back. If you can’t, you could end up sleeping in your car.
In short, you want to be exceedingly careful when you take out home equity loans. Don’t even think of borrowing against your home until you’ve addressed whatever issues caused the debt.
In other words, it’s one thing if you’ve got credit card debt because you’ve had a layoff, an illness or some other one-time, unforeseen circumstance that’s now over. But if you’re continually spending more than you’re making and living above your means, all you’re accomplishing with additional borrowing is postponing a disaster. Have your spending well in hand before borrowing to consolidate debt.
You might also consider alternatives to home equity loans. For example, you might find a zero percent credit card that you can transfer your balances to and pay no interest for up to 18 months. Just be sure you’ll be able to pay it off before that introductory rate goes away. You can check out some zero percent cards here.
Thing No. 3: If you’re having trouble, get some free help
If you’re in trouble, or would just like some free advice, turn to a nonprofit credit-counseling agency. For little or no cost, the agency will stand between you and your creditors, work out a payment plan, and get you completely out of credit card debt in three or four years. Is it easy? No. But it’s definitely better than staring at the ceiling all night and getting threatening calls from collection agencies all day.
If you’re ready to talk to one, click here. It won’t cost you a dime.
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The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.
I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.
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