Filed under: Home Equity Loan
Question: Because the interest is tax deductiable, sometimes you are better off >getting a home equity loan. If you still pay it off in the amount of >time it would take to pay off the credit cards, I think its a good >idea. If you let it drag on for 15-20 years, your making a mistake.
Answer: You are absolutely right IF you pay it off over the same term as the original debt. But one of the points the original poster was making was the ability to extend the debt out over a long term, and this is what I object to. Even with the deductability of the interest, when you extend debt out over a 15 year term (which is a normal term for this kind of loan) you end up paying 2 – 3 times the original debt just in interest payments. That isn’t frugal at all!
January 1, 1970
Question: I’m one who pays bills as fast as possible and uses the credit card very >sparingly. I say this because the manager of my bank called about a >favorable rate for a Home Equity loan, something around either 4=% or >4>%, “very close to prime.” Has anyone here been involved with such a >loan, thus able to offer pros and cons? It’s hard to imagine that such a >loan could be used to pay off a mortgage. What’s in it for the bank?
Answer: Probably an adjustable rate, guarenteed to go up to somthing outragous in the near future. No, you don’t want to pay off a 1st mortgage with a home equity loan because a home equity loan is also a mortgage.
One big gotcha on Home equity loans that we see a lot. People think that home equitly is free cash and like to spend it. But when it comes time to sell their house they have no equity. Therefore they have nothing to use for a downpayment on a new house. This is very bad. Even worse, they end up having to bring money to the table to sell their house because they have ne equity to pay the realtor’s commision and sellers closiing costs.
January 1, 1970
Question: One thing to watch for if you up the mortgage – make sure the >>amount you borrow clearly goes to build / purchase / improve the house >>it’s secured against. Otherwise the interest may not be deductible. >>Starting with a house that’s free and clear and taking out a big >>equity line, and then using that borrowed money to buy investments >>*may* not be deductible.
>Generally, borrowing money against your house is deductible as long as >the home equity loan does not exceed the acquisition indebtedness >and/or is under $100,000 regardless of what the money is used for. If >you exceed those amounts, you do need to be concerned about the >specific rules and the use of the loan proceeds. However, interest on >any loan used for investment is generally deductible as a misc. >itemized deduction subject to 2% of AGI floor. The easiest way for me >to remember, in general, what is deductible is this: if you incurred >the expense to generate taxable income, it’s probably deductible.
Answer: Good points …. that’s why I used the wording *may* not be deductible, because there are so many qualifiers, and I was trying to avoid getting into lots of specific what-if’s and bloating the post even further. Details end up putting it into the realm of “get REAL, professional advice, not mine”.
If the original poster ends up having to calculate Alternative Minimum Tax, what the money from the house loan was used for determines if it’s deductible for AMT purposes …. I think, but am not certain, the wording is something like “used to acquire, construct or substantially improve” the residence. Under that restriction a home equity loan used to buy investments would not be deductible when calculating AMT, regardless of $ amount or whether those investments produced gobs of taxable income in excess of the amount being deducted … etc … Can’t have those rich people being allowed to deduct consolidation-billpaying/kid-in-college/etc home equity loan interest, after all. 
Seems like the way Congress writes our tax laws, everything is “in general”. It’s the specifics that nail ya.
January 1, 1970
Question: Anyway, what else do people suggest?
If you can’t pay cash for it…YOU CAN’T AFFORD IT!
Cut up your last credit card.
NO ONE has ever borrowed their way out of debt. Getting out of debt is like loosing weight…..just one pound at a time. Pay off the smallest card first. Pay minimums on the rest. Eliminate the first debt. Pay off the next card and eliminate that….and so on.
Answer: It’s stupid to pay more in interest than you have to, especially with some cards running upwards of 20 percent. I’ll stand by my earlier advice to consider the home equity loan which is probably at a much lower interest rate. Consolidating the credit card debt onto anything with lower interest would also be advisable.
Choosing the card with the smallest balance to make the largest payments on is not logical unless it’s also the one with the lowest interest rate.
This advice does assume, though, that the debtor has been able to modify their spending habits and won’t start assuming new credit card debt.
January 1, 1970
Question: I recently consolidated all my bills with a home equity loan. they took all my monthly bills made them into a single payment and then put the loan out over a long period of time. I went from paying 486 dollars a month on all my bills to paying one bill of 176 dollars. There was no prepayment penalties at all, so when we get on our feet again, we can double up our payments or whatever, it is a good way to give yourself some breathing room if you need it. P.S. If you have bad credit (like me) there is a place that will still help you out anyway; gotta own a house though…..:)
Answer: Oh, and one more thing. The topic says ’save 3 to 5 hundred dollars a month.’ NOPE. A complete fiction. You’re not saving anything. Don’t kid yourself.
Debt is not an expense, it’s an obligation, and all you can ethically do is shift the time at which it is expected to be repaid. A debt consolidation loan converts short term debt payments, with high principal repayment, into long term debt payments, with low principal repayment. You aren’t ’saving’ . You’re
January 1, 1970
Question: The
Answer: So you prefer saving (gradually losing) 6 months pay in a savings account or CD that is essentially guaranteed to lose value (particularly after taxes and inflation) rather than build up an emergency fund by paying down 6%+ debt in home equity that you can get on a moments notice for emergency purposes? Hmm- sounds like a good way to throw away a good 5% of your money. I agree that borrowing against home equity for short term expenditures should be a last resort, but saving large sums of money at 1-2 % vs. reducing 6%+ interest on debt does sound like an odd approach. I guess it’s a “new math” approach” Or are you a banker looking for low-cost deposits?
I guess the question becomes from where do you get that emergency money? From a low-return savings accounts or short-term CDs? Borrowed from credit cards? From long-term CDs where you lose interest/get penalized by tapping early? 401k’s where you lose out on the tax free accumulations? Your money market approach makes more sense, but it still has risk with typically less return vs. paying down mortgage debt (especially if you are not itemizing).
Now if you can get an after-tax return greater than your mortgage rate, by all means go for it (or borrow to fund that investment). Unfortunately that rarely happens without great risk.
January 1, 1970
Question: I’m looking for a home equity product to pay for some home improvements and debt consolidation. There are quite a few options available to me (eg. loan vs. line of credit, adj. rate vs. fixed, etc).
Does anyone have any advice or can you point me to a FAQ or web site with more info?
Thanks in advance.
Answer: http://www.cardinalfinancial.com. We have a variety of products that can help you.
January 1, 1970
Question: So in 3 years your equity is well over the minimum needed to drop PMI if you >had it. If you had put 10% down and taken PMI, today you could drop it. >And in the meantime you’d have a lower interest rate on that 10%. Was it >worth it – once you refinance, woud it have been cheaper overall just to >have paid the PMI for 2 or 3 years? Would you recommend going the 80/10/10 >route? Would you do it again?
>This kind of arrangement wasn’t available when I bought my house, so I know >nothing about how it works.
Answer: I never compared it. The interest on the 2nd was higher, only a few percent, and it was on a much smaller amount. It was also deductible, which saved me quite a bit on taxes. I probably could have dropped the PMI in a year with how much my house appreciated, so maybe it would have been a good decision.
The other reason I went with the 80/10/10 that made it *really* worth it for me was that the 80% I financed was the maximum amount you could finance without getting a jumbo loan. The 90% jumbo would have given us a much higher rate, just because it was a jumbo.
So, in my situation, I would do it again, although I made a mistake in not doing something about the second earlier. I could have taken out a home equity loan 2 years ago at a much lower variable rate and paid it off. But then again, I didn’t know that rates would stay down for so long.
I don’t know if it’s right for other people. It is a neat option though.
January 1, 1970
Question: Okay, I’ve had to face the reality that I am broke. No only broke, but really really broke. So, it’s time for some serious action and I’m looking for some advice. So far I’ve:
Cut up all but one credit card.
Sold my motorcycle (that one hurt) – craiglist
Sold my ex-fiance’s engagement ring – craigslist
Divested myself of my timeshare – timesharerelief.com
And I know this sounds horrible, but I’m thinking of getting rid of my dog. Dogs are expensive. She’s a collie mix and eats a lot. My cousin has offered to take her, but he’s out of state. Should a man have to give up his bike and his dog in the same month?
Anyway, what else do people suggest? Should I get a home equity loan to pay off my credit cards? That sounds practical, but someone just told me that they read an article saying that was bad. Why? Any thoughts? Any other suggestions?
Answer: I’m an animal lover myself, and I say if you can manage emotionally to give her up, it’s probably a financially wise decision, especially since you have a trusted (I assume) relative where you won’t have to worry about what kind of home she’s going to. I bet there’s a way to have her transported there, even if you have to pay someone to. Is your employment situation stable? If so, AND if you have a substantial amount of high-interest credit card debt AND you can get a much lower interest rate on the home equity loan, I think it’s something you should consider. In your situation, this strategy is often recommended against for two reasons that I know of. First, you’re putting a second mortgage on your home, increasing your chances of losing it if you can’t pay both the first and second mortages. Second, unless something has happened to drastically change your spending habits, you run the risk of just running up the credit card balances again.
The most general piece of advice I can give you is to distinguish needs from wants. If you have to dig yourself out of debt, you might have to reduce spending on non-essentials to very little for a while. Don’t eliminate that stuff altogether, or you’ll probably become miserable. Just make the treats cheap ones.
Without knowing what you spend money on, it’s hard to offer specifics. For example, though, if you’re having money problems you can start with doing things like replacing Starbucks with grocery store coffee you brew at home yourself. Packing lunch to work. Cutting way back on dinners out. Finding decent quality clothes on sale or used. Combining errands to save on gas. Just start thinking about the impact of every financial decision you make, however small. It adds up.
January 1, 1970
Question: Hi everybody. I’ve been toying with
the idea of a home equity : loan for YEARS now. Here I am again considering it, but why does : it seem to me that home equity loans are too good to be true. : I keep seeing all these companies the last few years trying to : shove equity loans down people’s throats and while the reasoning : is sound if you have higher interest bills to pay off, I can’t : help but feel that there must be something inherently wrong with : this if so many sleazy people are jumping into the industry. Does : anyone have any advice or experience with this?
Answer: The home equity business took off when the federal income tax interest deduction for unsecured loans was dropped. No surprise, most people like the extra tax deduction. As for it being a good idea, it depends on what your plans are for your house in the next few years. If you are planning on staying there for several more years, if can be a good way to pay off existing debt at a lower interest rate. We did this several years ago. The drawback is, if you sell your house before the loan is paid off, this loan must be paid off at closing. Ours was not paid off, yet I still feel that it was worth it, because we did save substantially on interest.
January 1, 1970
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