Using your home to pay off your credit cards?
Home equity loans are great. They offer some of the lowest interest rates around, and they are easy for homeowners to get. So, when you look at your monthly credit card statement, that home equity line of credit starts to look pretty attractive. Right? You could borrow against your home, pay off your credit cards and save a fortune. But, this approach can be pretty risky, so put some thought into it before rushing to borrow against your home.
The biggest concern in borrowing against your home is the collateral. When you mis a credit card payment, you have little at risk aside from your credit rating. Credit cards are unsecured debt; you don’t put up any collateral. Home equity loans, on the other hand, are collateralized – with your home. If you default on a home equity loan, you could wind up putting your home at risk. Credit card debt may be more expensive, but in a sense, they also can be safer.
The next problem that many face involves the credit cards. After they pay off their credit card debt with a home equity loan, they start to use the credit cards again. What happens? Well, the borrower has to make payments on the home equity loan. But, he also has all this new credit card debt. In extreme cases, he could wind up with more debt than when he started.
If you plan to use a home equity loan to pay off your credit card debt, cancel the credit cards. This is the only safe way to use this strategy (though it is not completely safe, because you are still using your home as collateral). You need to be able to resist the temptation to use those credit cards again, and sometimes the only way to resist temptation is to remove it completely. Don’t just cut up your credit cards. Call the company, and cancel them. The customer service reps on the phone will do everything they can to keep you as a customer, including offering to increase your credit limit, lower your interest rate (probably only temporarily) and extend cash advances. Be strong. Do not accept these inducements.
If you are using a home equity loan to pay off your credit cards, be careful. Above all else, don’t use your credit cards any more!
Do I need to get out of my ARM?
Analysts expect a record amount of foreclosures in the coming months. In particular, “hot” real estate markets are at risk. Places like Boston, New York and San Francisco – which have seen housing prices grow astronomically for the past few years – could become the scariest markets for existing home owners. As mortgage interest rates go up, homeowners with adjustable rate and interest only mortgages could feel the squeeze. Believe it or not, your mortgage payment could grow every month, and with an interest only or adjustable rate mortgage, there is little you can do about it. Now may be the time to look into a fixed rate mortgage.
If you have a traditional fixed rate mortgage, you probably don’t have to worry. Your mortgage interest rate is locked in, regardless of what happens to housing prices around you. More exotic home loans, though, could be troubling in the current financial climate. If you have an interest only or an adjustable rate mortgage, refinancing should be a top priority.
The reason for the insanity in the mortgage market is the recent credit crunch caused by subprime mortgages. Subprime mortgages are risky. Lenders issue them to prospective home buyers who may not qualify for mortgages with more favorable terms. For a higher interest rate, the lender accepts the risk. Unfortunately, these loans have caused problems for mortgage lenders this year, leading to substantial losses. As a result, lenders are tightening the rules on subprime lending, and they are issuing fewer adjustable rate and interest only mortgages.
Borrowers who currently have interest only or adjustable rate mortgages may want to think about refinancing. As rates go up, your mortgage payment increases. You could see your cost of living increase every month simply as a result of changes in the market for mortgage interest rates. You are at the mercy of the market, and your home could wind up at risk. Instead of hoping for rates to be cut, you can take action today.
Refinance into a fixed rate mortgage, and enjoy the predictability of the same monthly mortgage payment every month. Your fixed rate mortgage may not be as cheap as the ARM with which you stated. But, times have changed, and so have interest rates. Hunt for a deal later. Now is the time to be conservative. Start looking for a fixed rate mortgage today!
A safety fund for your home
Every financial advisor suggests that you put aside a safety fund before you do anything else. You should save three to six months’ expenses in case you lose your job or suffer some sort of financial misfortune. You should have a safety fund before you save for retirement or put money into your kids’ college fund. You can take this thinking a step further and put together a special safety fund specifically for your home.
Think about the money you spend on your home. The monthly mortgage payment probably is the first thing that comes to mind. It is your largest home expense, and it comes every month. But, what else is there? Most people pay their real estate taxes through their mortgages, so it looks like the mortgage is the only expense. Think harder. In addition to your mortgage, you probably pay homeowners insurance. If you live in a condo or a coop, you have a monthly association fee. In some places, like New York City, this monthly fee can be quite high.
Next, there are the unexpected expenses. You may have a problem with your foundation, or you could have a flood in your basement. During a storm, you may find a leak in your roof. These problems have to be addressed, often quickly. They have to be resolved whether you have the money or not. While these expenses can be unexpected, you can prepare for them by putting money aside.
This is why your home safety fund becomes important.
Start with your mortgage payment. Put aside enough money to cover your mortgage for at least three months. Then, turn to your homeowners insurance and (if applicable) association fees. Do the same. Save enough money to pay your homeowners insurance and association fees for at least three months. Finally, think about the unexpected. How much would it cost to fix one major problem, such as a roof, kitchen or termite problem? Find out where your risk is most likely to be, and put that money aside, too.
It is always best to plan ahead. Put together your home safety fund. If you don’t need it, that money will do nothing but accumulate interest, which just puts more money into your pocket. But, if you lose your job or have to fix a leak in your bathroom, you’ll be happy that you have your home safety fund.
