Paying off debt
Question: I really enjoyed the thread on achieving financial success. Thanks to all who contributed and those who spent some time responding to questions and sharing information.
Unfortunately, I am in deep trouble after 5 months of unemployment. I now have a job and will start seeing some money soon, however, I am a little scared that it is too little too late. I need some very frank advice about how to get myself out of this hell hole of credit card debt.
I know the basic principle of paying off the highest interest credit cards first. I know that I can consolidate my debt but there are so many options, I’m a little overwhelmed. What’s better, a home equity loan or a home equity line of credit or a second mortgage? The line of credit has variable rate interest which scares me a little. I also know that I HAVE to start saving some money, too in case this ever happens again. How do you decide how much to save v how much towards paying off debt?
Thanks for any and all advice you can share!
Answer: It’s good that you’re working on this problem, although a bit hard to give meaningful advice without knowing all the specifics of your situation. There’s one thing I can say with some confidence, though. If you have a lot of very high interest debt (on credit cards or otherwise) it’s really important to try to lower that interest rate. Any kind of borrowing against your home will probably offer you a lower rate than what you pay on credit cards, for example. But the down side is that if you default you place your home ownership in jeopardy.
Personally I’ve always avoided variable interest debt–the uncertainty makes me uncomfortable. Going only on what you said in your post, in your position if I could get a lower, fixed rate via a second mortage or home equity loan I’d do so and pay off the higher-interest debt ASAP. Since you must already have a mortgage, I’m going to guess you’re itemizing your deductions, and the added home mortgage or home equity interest will be deductible. This would help offset the closing costs you’re going to incur on those kinds of loans.
I think you’re the only person who can decide how to apportion your savings vs. debt reduction. Perhaps you might want to pay as much as possible on the debts at first and as they gradually reduce, increase the amount you are saving. You do have the right idea about needing an emergency fund, though.
Best of luck. Many of us here have climbed back up out of debt, and you can too.
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.