Considering home equity loan for credit card and ed loan payoff

[Anonymous]

Hi, everyone!  Would like to gather some comments about this topic.  I know, I know -  generally not a good idea to move unsecured debt to an equity loan due to the risk of losing the home.  We've been doing a ton of research on the subject.  However, we've also read that it might be advisable in some situations.  It may be the only effective way to turn things around for us.  Here is a summary of our situation.  We have about $50K in credit card debt and $50K in education loans.  We are not behind on any payments, always pay more than the minimum to stay ahead of the interest, and have FICO scores of  691 (Eqfx) and 710 (TU).  Our real problem is CASH FLOW.  Our monthly income is variable (self-employed rather than a standard paycheck), and the monthly income typically just covers our expenses (primarily cc debt and insurance), but we're often short and end up using the credit cards for the shortfall.  We don't have a bunch of frivolous purchases on the cards, but the level of debt has built up over the years mainly due to a serious drop in income for a couple of years.   So, we are thinking about a home equity loan (not an LOC) to pay off all the higher rate accounts.  The house is mortgage-free.  We would borrow about $100K, and our loan rate would be about 6% instead of an average 12% on our current debts.  We would do the HEL for 10 years which would approximate the timeline for paying off the current debts a la carte.  The main point of all this - we could cut our monthly debt payment by $1,000, which would go a long way toward building up some savings, putting money back in our IRAs, and having some extra cash to use each month instead of the cards.  An important point - we understand that not using the cards once paid off is critical in this scenario, and we are committed to that approach.  We believe the money freed up by the lower HEL debt would allow us to start getting ahead.  Since we've been making the current payments, there should be no problem with making the lower HEL payment.  We realize that the interest rate savings will be offset in the long run due to the extended loan term.  But if we have a better cash flow to work with, once we get things more stable, we believe we can pay off the HEL more aggressively to minimize the total interest paid.  We would appreciate any opinions you would be willing to share.  Thanks.

[Anonymous]

I wouldn't if I were you.  that is just me.  As you said, taking unsecured debt and putting your house on the end of it is almost always a bad idea.  I would lean more towards doing whatever I had to do to lower expenses or add income.  I know that is not easy to do at times, but that is the key.  If you do what you are talking about, and hit another period of downturn, you will end up with either a forelcosure or another mountain of debt to repay while a the same time paying a mortgage.  I knwo you are serious about not using the cards gain, and absolutely no offense meant, but so is everyone who refinances to pay them off...until someone gets sick, it's a Brithday or xmas, or work is a little slow.  Non of that deal with what is the basic problem which is living beyond what the income supports.  That habit is the issue, not the debt you have.  If you do as you are talking, I wish you the best luck in sticking to that plan but the odds of it are way against it.

I would consider doing one of two things...

See if the student loans will allow you to take a 12 month forebearance for economin reasons.  If they do, use the SL money you would have paid to pay down as many of the CC's as you can and TEAR THEM UP.  Closr the accounts (except maybe 1 for emergencies.  

The other option is to contact all the cc companies and arrange a payment plan to pay them off.  It will mean closing them generally and will not have a great affect on your score until they are paid off due to utilization.  They will usually work out payment plans and reasonable interest rates for people trying to dig out of debt.

You could attmep to both of the above and possibly give yourself some breathing room to recover and get back on track.

Anyway, to each their own, but I have a very strong belief  that borrowing against your home to pay off financial mismanagement is always a bad idea.  Also, I think the savings will be less than you expect.  I could be wrong, but people on here were saying HELOCS were running a bit more than 6% right now.