Every month you manage to make just the minimum payments on your credit cards, but you realize that you aren’t making a dent in the principal. Most of your money goes to cover the interest on the debt.
You feel trapped in this seemingly never-ending credit card cycle. You start to wonder if there’s a better way to make a dent in this debt.
Aha, you think, I’ve got some equity in my home — which means your home is worth more than the mortgage you carry. And you can qualify for either a home-equity loan or line of credit. (Read: What is the difference between a Home-Equity Loan and a Home-Equity Line of Credit?)
Why shouldn’t you use the equity to pay off your credit cards, you wonder?
In fact, 44 percent of homeowners think it’s fine to use home equity to consolidate consumer debt, according to a new survey by Bankrate.com. In the survey, I was astonished that 12 percent of respondents thought it was okay to use home equity to invest. But let’s get back to the debt.
“With the sorry state of emergency savings and increasing levels of consumer debt in a rising interest rate environment, it is a matter of when, not if, more homeowners turn to home equity to fund home improvements and repairs or consolidate debt,” Greg McBride, Bankrate’s chief financial analyst, said in releasing the survey results. “Many Americans may have more tappable equity than they realize, and as home values increase and mortgage principal is paid down, that equity is on the rise.”
Because home-equity interest rates tend to be lower than what lenders charge credit cards and personal loans, people see borrowing against their home as a viable option.
A colleague sent me a link for this blog post: How I Used My Home Equity to Pay Off My Credit Card Debt
Overwhelmed with credit card payments every month, the person was looking at three options.
— Home-equity loan
— Home-equity line of credit
There were sound pros and cons for each choice. However, be sure to read the comments section, because I agreed with a lot of readers who pointed out that using your home’s equity is often not a good idea.
“I have two different friends who have attempted to use their houses like they were ATMs and both have lived to regret it and both lost their houses. The best thing she could do is learn to actually manage her money,” one reader wrote.
Here’s something else to consider. When you take out a home loan to pay off credit card debt, you’re replacing unsecured debt with secured debt. Should you later find out you need to file for bankruptcy protection, you’re jeopardizing your home.
“If the money is being used to pay down credit cards or buy a car, then think twice about doing it at all. Those kinds of debts should be paid off in the short term, not with long-term borrowing,” certified financial planner Monica Dwyer told NerdWallet’s Liz Weston.
Also, the tax break for home-equity loans is now limited.
As I wrote, in my experience, many people who get a home-equity loan tell themselves it’s a good thing to exchange high-interest credit card debt for a lower-cost home-equity loan or line of credit. Except that once they have zero balances, many people end up running the credit cards right back up.
As the economy has improved, homeowners are again are looking to tap the equity built up in their homes. Avoid the temptation. Don’t use your home as though it’s an ATM.
One other thing: If you do decide you’re going to go ahead and borrow against your home’s equity to get rid of credit card debt, you should change your language. What you say to yourself if important. You’re not “paying off” your credit cards. You’re just swapping one debt for another.
Color of Money Question of the Week
If you’ve tapped your home equity, how did that work out for you? Send your comments to firstname.lastname@example.org. Please include your name, city and state. In the subject line put “Home Equity.”
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Do you save when you use coupons?
In a recent newsletter, I asked: Are you addicted to coupon shopping?
Diane DeBok of Riverside, Iowa wrote: “I used to feel guilty about the fact that I no longer clip coupons. The fact is, most coupons are for things I never use. Just keeping an eye on sales and what I have in the pantry has proven to be a much better strategy.”
Norm Ishimoto of San Francisco wrote: “In our 20s [through] 40s we tried it and discovered . . . coupons tended to push extremely crappy crap. Now we are 70 and have refined our shopping techniques, and couponing is very rare.”
“I am not addicted to extreme couponing but I used to waste a lot of time collecting and sorting coupons I would never use,” wrote Lucy Frank of Prospect, Ky.
Here’s what Frank says are the biggest issues with extreme couponing: 1) “You haven’t saved any money until you have used items you would have bought at higher prices. If you have hundreds of items in your stockpile, it will be a long time until you realize the savings.” 2) “You aren’t taking into consideration the deterioration of items in your stockpile. You may have boxes of condiments that have not technically expired but have separated or the taste has deteriorated. You may have cases of bottled water, but the bottles these days are designed to be at least somewhat biodegradable. You will be drinking the chemicals contained in the plastic along with the water.”
Margaret Siemers of Dillsburg, Pa., wrote,” I still cut a coupon out now and again if it is for something I need and use or would like to try. I find the criteria for my cutting them out is met less and less these days as what is being pawned off on us isn’t a deal anymore.”
Adrienne Washington of Oxon Hill, Md., wrote, “I’ve always thought extreme couponing was wasteful, because what are you going to do with all of that STUFF? Like you, I was pressed to cut out and have as many coupons as possible. I would even buy a second paper just to have extra coupons. But I found that most of the things were things I’d never eat or use. Many stores now have the electronic coupons that cover the store brand items. When they do have name brand items on sale, I do try and use a manufacturer’s coupon to get that ‘extra’ savings. For clothing/accessories I have multiple emails about how much I can ‘save’ if I buy $150 worth of whatever. I laugh and delete because I’m still spending $75 plus dollars that I had no intention of spending until I found out I can SAVE money!”
“I’m not much of a coupon clipper. However, a similar problem is the propensity to shop at Costco because the giant sizes are so much cheaper,” wrote Bunnee Butterfield of Edmonds, Wash. “Same problem though — for my family of two, a gallon jar of mayonnaise or a three-pack of huge bottles of ketchup makes no sense and takes up too much space. We buy some things in bulk, but only if they are items we use regularly and which don’t expire. I had to establish a rule about big box shopping: If it is not on the list, we don’t need it. One impulse item allowed, but otherwise, only products that we NEED, not want.”
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