Need Loan Advice
Question: Hello! I need some loan advice because the options are a little >confusing. We have owned a home for almost two years now and the way >we obtained the home was two mortagages. The first was for 90% and the >second was for 10%.
Yikes!
>We would like to payoff some credit cards and make >some home improvements. What is the most suggested way to go in this >situation. I am not sure we would qualify for a home equity loan >because we have been living here too long. >What is this Interest only >loan option, Like Commerce Bank is offering?
Answer: There is no such thing as “living here too long” for a home equity loan. Your problem is you have almost no home equity! You’ve been living there too SHORT to have built up any equity. Most everything you have been paying is for interest. Digging yourself deeper and deeper and deeper. Actually, you’re pretty close to that now.
Recommendations:
- Budget. – Cut expenses. – Make at least minimum payments on everything by the due date. (If you can’t do that, you’re really in trouble) – Keep an emergency fund of, say, $1000 to deal with cash flow hiccups like car breakdowns and emergency room visits. You’d like to build this up to 6 months take-home pay eventually. Note: Christmas does not constitute an emergency unless the government unexpectedly moves it from December 25 to April 15 and you didn’t find out about this until April 14. – Payment late fees are generally much cheaper than bounced check fees PLUS payment late fees. Don’t kite checks! – Avoid charging any more on your credit cards that you can’t pay off immediately. – With extra money, pay off the highest interest rate loan first. The effective interest rate on loans with tax-deductible interest is lower by your tax bracket than loans with non-tax-deductible interest. (e.g. a 6% home-equity loan with a tax bracket of 15% is equivalent to ((100-15)*6%/100)) = 5.1% Pay off those 20% credit cards first.
This sometimes gets tricky. If you got a balance transfer of 0% for a year deal on a card, extra payments likely pay off the 0% balance first, not the absurd high interest rate on the rest of it. So pay off a different card first until the deal is up, or you run out of other cards you haven’t paid off. – If you pay off a card, use money previously used to pay that card to pay the next card. Don’t add it to what you can afford to spend. – Consider using a balance transfer to get a lower interest rate. The objective here is *NOT* “lower payments”. Paying only minimum payments is a trap. Money from lower payments should go to pay off the newest highest-interest card off faster.
Related Posts
Filed under: Home Equity Loan
Leave a Comment
XHTML: You can use these tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>
TrackBack URL | RSS feed for comments on this post.