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MMI Cautions to Think Twice Before Tapping Your Home’s Equity
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For more information contact:
Kelly Rote (713) 394-3201 |
Release Date: March 29, 2005 |
With interest rates remaining relatively low, consumers may think that a consolidation loan is an easy answer to debt trouble. According to the Federal Reserve, Americans borrowed a total of $701.5 billion from their home equities as of the end of 2003, up from $416.2 billion in 1997.
On the plus side, debt consolidation loans are attractive because it is much easier to make one payment instead of writing checks to all of your creditors every month. For some types of consolidation loans, interest paid may also be tax deductible. However, Money Management International (MMI) offers the following things to consider before proceeding with this type of financing:
Not everyone qualifies. If you decide to try to consolidate your debts, the first hurdle will be to qualify for the loan. Your ability to get a consolidation loan will depend on three primary qualifications: (1) your probability of repaying the loan; (2) your credit background to verify repayment record; and (3) the necessary collateral to guarantee repayment. Lacking any one of these three qualifications could result in a denial of your request for the loan.
Your credit rating affects your loan terms. Consumers with good credit scores will be awarded with lines of credit at or just below prime rates. Those with low credit scores may end up paying one to five points over the prime rate. Additionally, consumers with good credit scores can usually avoid application and appraisal fees.
A lower monthly payment does not mean lower monthly cost. To understand the true cost of credit, figure out what you will be paying over the life of the loan, rather than just looking at the monthly payment, and be sure to factor in all of your closing costs. Consider the length of time you plan to be in your home and its marketability if you had to sell.
You could lose your home. Before you consolidate credit card debt with a home equity loan, be aware that you would be trading unsecured debt for secured debt. This means you are putting your biggest asset—your home—at risk for foreclosure if you are unable to make the loan payments on your credit cards.
“If you do choose this type of loan, be sure to close all your existing accounts to avoid the temptation of incurring more debt,” said Cate Williams, vice president of financial literacy for MMI.
MSN Money reports that nearly two-thirds of the people who borrowed against their home equity between 1996 and 1998 to pay off credit cards had run up more card debt within two years (Brittain Associates). Too often, the zero balances are too tempting and the consumer ends up in more debt than when they started.
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Money Management International, is a non-profit community service organization that provides confidential financial guidance, counseling and debt management assistance to consumers. MMI helps consumers trim their expenses, develop a workable budget, lower their debt payments and repay debts. Services are available by phone. To visit with an MMI counselor, call toll-free 1-800-762-2271- 24 hours a day, 7 days a week. Spanish speaking counselors are available. Consumers can also learn more by visiting the MMI home page at www.moneymanagement.org.
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