So Much Debt... What Do I Do?
by Diane St. James, Underwriter
I often times consult with people who ask me my
advice about getting a second mortgage. The reason
I'm being asked about this is usually because
people have racked up so much debt, they don't
know what to do.
Some even get to the point where they "rob
Peter to pay Paul". If you haven't heard this
expression before, it basically means if you are
borrowing on one visa to pay other bills, you're
robbing Peter to pay Paul. If you find that you do
this and more often than you'd like, you're not
alone, believe me! Why do you think credit card
companies keep increasing the available balances
and offering cash advance checks for convenience?
Besides offering the obvious advice of cutting up
all credit cards except one or two and creating a
budget and sticking to it, a home equity loan may
be your salvation, if you own a home. Even if you
don't have any equity at all, there are lenders
that will lend up to 125% of the value of your
home. Scary thought I know, but as long as you are
planning on staying in your home a long time (so
that you don't OWE thousands when you are trying
to sell it), it is not a bad option. That is as
long as you don't rack up the debts
again...because after that there is no more room
for another mortgage usually.
If it gets too bad, there are always consumer
credit counseling agencies, and attorneys to
consult if bankruptcy appears to be the only
option.
But let's get back to the home equity loans. These
loans are usually at a higher rate than the first
mortgage rates, but they serve their purpose. And
the less equity you have, the higher the interest
rate. If you are one of those people in the 125%
LTV (loan to value) range, you may be looking at a
rate of 14.00% or more, but it may be worth it to
consolidate all your credit card debts into one
payment.
There are generally two types of home equity
loans. There are closed end fixed rate home equity
mortgages that work the same way as your first
mortgage; set original loan amount, set payments
each month, set time frame to maturity.
Then there are things called HELOCs. This stands
for Home Equity Line of Credit. This usually has
an adjustable rate feature, no exact maturity
date, and the balance is flexible. There is a
maximum loan amount, but the whole thing can be
used or just a portion. This type of loan is good
if you are planning on borrowing for something
like home improvements, then paying it back then
borrowing later toward maybe a car or a child's
education, paying that back, and so on.
Either loan can provide the help you need for
consolidating your debts. And equity mortgage
interest can also be included in your Itemized
Deductions, Schedule A, up to a loan amount of
$100,000 I believe (unless this tax law has
changed). (I used to be up to snuff on all of this
being an ex H & R Block employee.)
If you don't own a home...well, you have to look
at other options. I'm always pointing out why it
is good to be a home owner and this is one more
good reason for owing a home!
Diane St. James is a mortgage professional with 20
years experience. Her website http://www.abcmortgage.net
exists to help educate people about the mortgage
world. She is the author of "How to Get a
Mortgage", an ebook filled with vital tips
and secrets, and publishes a weekly ezine called
Diane's Mortgage Tips + Other Tidbits. To
subscribe http://dianesmortgagetips.mailmylist.com/cgi-bin/mojo/mojo.cgi
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