Monday, March 19

Consolidate Debt With a Home Equity Loan

Is it a good idea to consolidate debt with a home equity loan? Well, it really depends on a number of things, but none as important as how you feel about it. In this article, I'll talk about a few of the benefits and risks of consolidating debt with a home equity loan.

There are a number of risks associated with consolidating debt with a home equity loan. After consolidating all of their bills into one, many people feel very relieved to not only have fewer bills every month, but in many cases, they have more cash each month. Unfortunately, having more cash each month makes some people feel 'richer', and the next thing you know, they've gone and financed a different car. Their mentality is that since they've got a few 'extra' hundred dollars every month, they can now afford a higher car payment. The problem here is that they aren't any richer, they just have better cash flow.

Risk #1- Better Cash Flow = Adding More Debt

Now, you've refinanced your debt by consolidating it into a home equity loan. You've improved your cash flow, and your car. Now, it seems like you're getting a bunch more credit card offers in the mail, many of them offering zero percent for 12 months. So, you think why not; I'll use it from time to time and when the zero percent period ends, I'll just pay it all off. How can you pass up a zero percent offer anyway? The problem here is that you cannot afford any more payments! You've consolidated your debt into a home equity loan, improving your cash flow. Then, you used that 'extra' couple of hundred bucks to get a new car with. Instead of a two hundred dollar per month car payment, you've now got a $375 per month car payment. And, because you've paid off your credit cards, but left them open, you've lifted your credit score. Now, everybody with a credit card is offering one to you, and your taking them!

Risk #2- More credit available to you = More credit that you're using

So, now you have a home equity loan payment, a higher car payment, and a credit card payment. Your slowing going down the same road that led you to needing the home equity loan in the first place. If you continue down this road, you'll need another consolidation loan. History has a way of repeating itself UNLESS we learn from the mistakes of the past. But, what if you don't have any equity in your house next time? What happens if you cannot get another home equity loan?

Risk #3- You'll keep piling on debt until you're over your head again!

Okay, now for a couple of benefits.

Your credit rating might improve. How? As mentioned earlier, by paying down revolving credit and NOT CLOSING the accounts, the credit scoring models will see that you have more credit available to you. This is one of the primary factors that lead to a higher credit score; available credit.

Benefit #1- Better Credit Score

Another benefit is that if you itemize your taxes, in most cases interest from a mortgage loan is tax deductbile. By consolidating revolving and other type of consumer debt into a mortgage loan, you might be able to reduce your tax obligation. Lower taxes mean more money for you!

Benefit #2- Lower tax obligation

Being able to meet your obligations gives you a sense of accomplishment; helps you gain control and feel in control! Knowing that you're not living beyond your means and that your better able to face a financial crunch because you are a good money manger gives you some peace of mind.

Benefit #3- Peace of MInd

In the end, Home Equity Loans can be good, and they can be not so good. It really depends on you and your circumstances.

To learn more about home equity loans, visit

Jacob Silverman. "How Home Equity Loans Work". December 05, 2001 (March 17, 2007)