Paying off credit cards with Home Equity Loan?

[Callie]

While borrowing against the home isn't a good idea, we can't just jump on the OP and assume it was due to dumb spending habits. How do we know they didn't have a sudden illness, sick pet, or something bigger?

 

[jaybirdsmommy]

I thought we were doing the right thing (vs. bankruptcy like all of my peers are doing). We have A LOT of cc debt and could barely afford the monthly payments. The papers have been signed, thanks for your input everyone.

Don't beat yourself up. Sometimes you need to buy yourself some breathing room. Moving the debt to home equity might not be the best thing in the world, but it's better than bankruptcy and it's definitely better than killing yourself stressing out over how to make the payments. Now, just work out a budget to get the home equity loan paid off ASAP (which should be a little easier with the lower interest rate) and close the card accounts so they don't get run up again.


I'd suggest, if you haven't done so already, get a copy of one of Dave Ramsey's books. Either Total Money Makeover or Financial Peace. Not all of his advice is great (some of his investing ideas are very outdated), and he's a little pretentious at some points, but his initial steps for getting out of debt are pretty good.

 

[badiggio]

As long as you learn from this,I think you did the smart thing.The money you save on these high interest loans will make a big difference in your pocket and should help you avoid charging to your cc.

 

[crisi]

You should never convert unsecured debt (credit cards) into secured debt (equity/collateral loan) EVER. I wish someone had explained this to me back in the day. The only reason you should refinance your home is to make your investment greater (i.e. home improvements, lower interest rates).

Really? Never EVER? I do it all the time. I'm fairly financially successful and fairly financially well educated (I majored in accounting and finance). I could buy my home three times over easily with other assets (more if I sacrifice the college funds), so I'm not exactly putting my house at risk. I don't like the tax consequences of pulling money out of the market. I like the tax consequences of writing off interest - and the money I have in the market tends to be dividend stocks that return better than my HELOC interest rate. And we have a variable income.

If the market drops enough that my house is at risk, we have way bigger problems. Like a collapse of the economy.

As I said, there are always exceptions.

MOST of the time its a bad idea. Never is a strong word, and without knowing alot about the circumstances, I couldn't tell if its a bad idea or not for the OP.

I'm not picking on just you - almost nothing about personal finance is as simple as never or always. And I wish someone would have explained that to me back in the day.

 

[fbb]

While borrowing against the home isn't a good idea, we can't just jump on the OP and assume it was due to dumb spending habits. How do we know they didn't have a sudden illness, sick pet, or something bigger?

When all of her peers are declaring bankruptcy, it's a natural assumption, though maybe not a correct one.

 

[supersnoop]

I like the tax consequences of writing off interest

I thought HEL and HELOC interest could only be written off if you spent the money on home improvements.

 

[laura3773]

That's going to be state specific. Laws will vary, but it's not possible to garnish wages or bank accounts for unsecured debt in many states, and the threshold were a bank would actually pursue a judgement is going to be pretty high.

Fair enough - but I work at a bank in Virginia and have seen credit card companies garnish here for $1,000 or $1,500 - OP is using this for $10,000. Just pointing out that depending on where you are, you CAN wind up having to pay your unsecured debt and it can often be with little warning at a terrible time.

 

[kymom99]

I thought HEL and HELOC interest could only be written off if you spent the money on home improvements.

I have a HELOC and I have never had to prove what I spent the money on to deduct the interest on my taxes.

 

[a742246]

I have a HELOC which I never use. It didn't cost me anything to get but its there in case I need it. I tell all my friends that are approaching retirement age to get one before they retire because it doesn't hurt to have one and you may not be able to get one once you retire. You never know if you will need it in the future!

 

[Gr8t Fan]

I have a HELOC which I never use. It didn't cost me anything to get but its there in case I need it. I tell all my friends that are approaching retirement age to get one before they retire because it doesn't hurt to have one and you may not be able to get one once you retire. You never know if you will need it in the future!

A Q if you don't mind. Are you required to take a distribution from the HELOC in order to open one and keep it open? We've paid off our mortgage but have 1 in college (on full scholarship if she can keep her grades up - which is a bit iffy at this point), one ready to start college in Fall 2017 and another two not far behind. We're planning to cash flow as much of their tuition as possible, but would like the option of the HELOC if we don't have to take $ right away.

 

[a742246]

Our bank doesn't require (at least it didn't 4 years ago) a distribution from a HELOC. Some require a low minimum ($100.00) you would have to see what your bank would offer?

 

[Gr8t Fan]

Our bank doesn't require (at least it didn't 4 years ago) a distribution from a HELOC. Some require a low minimum ($100.00) you would have to see what your bank would offer?

Thanks. I'll check with them.

 

[mickeymom629]

A Q if you don't mind. Are you required to take a distribution from the HELOC in order to open one and keep it open? We've paid off our mortgage but have 1 in college (on full scholarship if she can keep her grades up - which is a bit iffy at this point), one ready to start college in Fall 2017 and another two not far behind. We're planning to cash flow as much of their tuition as possible, but would like the option of the HELOC if we don't have to take $ right away.

This was us about 9 years ago. We did this with DS #2 (out of 4 kids, also). It seemed like a good idea at the time because we had two in college and thought there'd be no problem paying it off as soon as DS #1 graduated. Then DH lost his job of 30 years and, luckily found another, but not nearly the salary he had. I had just gone back into the job force, working part time. So, we used the HEL to help pay and, as soon as we could, we rolled our HEL into our mortgage when the interest rates dropped. My job became full time and our income got back on track. We have managed to put the last two through with 529s, CDs, and a little help from Gpa.

I know DH really wanted to do this for our kids but I was very upset that we used the HELOC for college, though it sounded like a good idea when he had a great paying job and we didn't think we'd have any problems paying.

I think it would have been better to have let the kids take loans out, and give them money to pay it off. That way, they would have more "teeth in the game" and we weren't financially obligated.

 

[Gr8t Fan]

This was us about 9 years ago. We did this with DS #2 (out of 4 kids, also). It seemed like a good idea at the time because we had two in college and thought there'd be no problem paying it off as soon as DS #1 graduated. Then DH lost his job of 30 years and, luckily found another, but not nearly the salary he had. I had just gone back into the job force, working part time. So, we used the HEL to help pay and, as soon as we could, we rolled our HEL into our mortgage when the interest rates dropped. My job became full time and our income got back on track. We have managed to put the last two through with 529s, CDs, and a little help from Gpa.

I know DH really wanted to do this for our kids but I was very upset that we used the HELOC for college, though it sounded like a good idea when he had a great paying job and we didn't think we'd have any problems paying.

I think it would have been better to have let the kids take loans out, and give them money to pay it off. That way, they would have more "teeth in the game" and we weren't financially obligated.

Thanks for sharing your situation. We definitely will have them max out whatever loans they are eligible for (especially subsidized loans),before we would ever consider tapping into home equity considering how hard we worked to pay off our mortgage. We just weren't sure how things worked with the HELOC.