When Home Equity Loans Are the Wrong Choice

Home equity can be one of the positive surprises in a family’s budget. Month in and month out you make the mortgage payment – each one increasing the home equity by a little bit. In a matter of time the home equity will increase to a significant amount. One of the primary reasons that this treasure will increase is that the home equity is managed separately from normal cash flow. The normal cash flow situation may be well under control, or it may look like someone trying to put out a three-alarm fire with a garden hose. All the needs and wants of the entire family are clamoring for that cash flow. Even when the garden hose is about to burst, the home equity continues to grow.

Many people, including the writer, have made wrong choices about home equity. Those around us often encourage these wrong choices and the financial systems make them easier than ever. Here are some ways that I’ve inflicted damage on my home equity.

Pay off credit-card debt with a home equity loan
If you are a homeowner with some home equity, then I know you do not need to look for opportunities to borrow against that equity. They are in your mailbox almost every day. One of the often-touted reasons to get a home equity loan is to pay off credit card debt. It sounds so sweet to set up a line of credit, and then use a check or debit card to access that cash. Good-bye credit card debt, cause the check is in the mail! Many financial experts would be there licking the stamp for you.

This plan works out well on paper, but not in real life unless you cut up the credit card and close the account. Nearly two thirds of the people who secure a home equity loan for this reason go on to generate more credit card debt. In the final analysis you have more debt, and by the way, your home equity is reduced. People who attempt to do a debt consolidation using a home equity loan tend to do it over and over. The eventual end of the cycle is that your home is at risk.

To date I have fought the urge to accept one of the home equity loan offers. However, I have been able to reduce my home equity by refinancing my mortgage with a cash-out option. This is just a different path to the same pit.