Financial Guru's - I need some advice...

[luvthatdisney]

Ok guys,

I have been reading all of the threads about debt, being debt free, etc... Well DH and I are not debt free, but we are not late on anything and usually I pay extra on cc's. My question is - and I know alot of the financial people (Suze, Dave Ramsey...) are against doing this, but DH is adamant this is what he wants to do - he wants to get a home equity line of credit (heloc) which he will use to pay off high interest credit cards (19%) and use the rest to remodel our kitchen. Our kitchen is in bad shape and it is very small - we are not going to add on - but remove a wall and relocate the fridge. We do have alot in equity and our credit is excellent. From what I can tell the payment would be smaller than what we pay on the credit cards so I could probably pay a payment and a half at a time and when our taxes come back next year apply the whole thing to the loan. We have also cut up the credit cards we would be paying off. I only have one other cc - with a low interest rate 4.99% that we would not cut up - it does have a balance as well. I could move some of the other cc debt to it - but not all.

We do not have much in savings and DH does work a side job (he does report the income) which is mainly for his car hobby - but he said he would start puting half of what he makes into a emergency account. Should I talk him out of the heloc? He really wants to get the kitchen fixed - it just makes life miserable with the kitchen being the way it is. What are the negatives of doing this???

Any help would be appreciated! I want to present DH with all info I can before we do this.

 

[ducklite]

Using the equity in your home to do upgrades which will add to the value is almost always a good thing, as long as you can handle teh payments.

The credit cards are another matter. IMHO, if you TRULY will be cutting up those cards after they are paid off, I think it might be a good idea...BUT, I would be careful with the HELOC, many are interest only on the payments, so while the monthly payment is smaller, it's not comparable. Be VERY careful. You might be better off with a fixed rate second mortgage. You get a one time cash out payment, and a fixed monthly payment that is P&I. My advice is to go that route, and to pay as much on it as you were on teh credit cards to pay it off fast.

Anne

 

[tamu91]

as long as you can handle teh payments. Anne

I think this is the magic phrase. I see a couple of issues here that should be addressed before deciding if home equity line of credit is the right way to go.

First, if you're paying 19% interest on your CCs, paying it off with a home line of credit sounds like a good idea, assuming interest on the HELOC is much less. You're going to be making payment either way so go with the lesser evil.
Remodeling part throws up a red flag. True, kitchen remodel is one of the more constructive improvements you can make to improve the value of any home. But are you going to be selling your home anytime soon? If you're not fixing it to sell, the profit won't be recognized for quite some time. Could you pay off the loan along with your other bills? If not, it's possible you'll be in more debt. Not a good idea IMO.
There is such thing as positive debt but that only applies if you can manage your debt in the first place. I'd pay off your credit card bills first.

Good luck to you and God bless

 

[EthansMom]

How long have you lived in the house? Years? And having a small kitchen hasn't killed you yet, right?

What you're talking about is adding to your debt. Yes, the interest rate would probably be relatively low and would be tax deductible. But you're really talking about adding to your debt. If, god forbid, you or your DH suddenly became unemployed, added debt would only make it that much more difficult to pay your bills.

If I were you, I would start saving some money each month into a savings account for emergency savings. And I would use the snowball method to start paying off the credit cards. And then, I would figure out a budget for the kitchen remodel and save each month until I had enough money to do the job without going into more debt.

(My answer would be different if you didn't have the credit card debt and had some money in savings. But with credit card debt and no money in savings, you're one lay-off or severe illness/injury away from having real financial problems -- scary, but true.)

I hope this helps!

 

[Twinkies]

Just a thought but if you've got alot of equity in the house, what is the interest rate?

Maybe you could take a cash-out refinance and lower the interest rate on the entire balance.... that way, your mortgage payments could stay the same as they are now, but with a lower rate, you could get the cash to pay down the credit card debt and remodel?

 

[luvthatdisney]

Thanks guys,

I really appreciate your advice!! I will give all of this info to DH and hopefully I can sway him into waiting and saving (emergency fund) and paying down the cc's first and maybe with our income tax refund we can start on the kitchen next year. You guys are great and it is really nice to have a place to ask questions and get intelligent answers.

We are not great with money - and I do want to improve things and this is really kicked my butt into gear about financial matters. I need to learn more and also teach my kids how to handle money responsibly (as DH and I never were informed!!). His parents are on their 2nd bankruptcy - I do not want to go that route!!

 

[disneysteve]

I think the previous posters have given some good info. I agree that you should build your emergency fund FIRST. Don't take on more debt before doing that.

I also agree that a loan is better for you than a line of credit. That gives you a fixed payment and a fixed interest rate. Rates are probably on the way up. Better to lock in now. Using a home equity loan to pay off a 19% credit card balance is a great idea and will save you a lot.

 

[luvthatdisney]

Thanks!!!

Well I talked with DH and we decided to set up the emergency fund first. We do tend to cut things close sometimes so I think this is important. I have looked at the "baby steps" by Dave Ramsey and I think we are going to try and follow him and see how we do. I have already set up an online savings account with you know who and set up weekly deductions - if its not there I cant spend it!!

Once we get to the $1000 mark I am going to start the snowball debt reduction. I think I can live with the kitchen the way it is for a while longer. We do not anticipate moving at least for the next 6 years (until dd graduates high school) - we live close to her school now and not far from the high school ds will go to next month.

Having an action plan sure makes you feel better and I think DH agrees (for now)!!

Thanks again guys!!