Home Equity Loans-need Advice

Updated on September 23, 2011
S.A. asks from Chicago, IL
12 answers


I'm hoping some of you financial gurus can give me some advice. My husband and I are considering taking out a home equity loan. The reason for this is to pay off our credit card debt. Let me say first that we have NOT racked up this debt by being careless or frivolous. It has built up over the last 6 years since I quit my job to be a SAHM. We live mostly paycheck to paycheck, so when unexpected expenses have come up such as car repairs, water heater, root canal etc... we've had to charge them. At this point, we feel like we are starting to drown in this debt. We pay some of it down, then fall short some months and have to charge whatever we can't cover and start all over again with paying it down. So, last night we stayed up until midnight and talked about whether we should get the home equity loan and pay off the entire amount of credit card debt. We'd also like to borrow enough to set up an emergency fund of at least $1000.00 so that if we have unexpected expenses, we can use the emergency fund instead of charging. We know that the only way this would work is if we are able to stop charging completely. We feel that with getting rid of all of the debt, having the lower monthly payment for the loan, being able to deduct the interest from the taxes, that this would be a great solution for us. Has anyone done this successfully? Can anyone see any major pitfalls outside of having to repay the loan before you sell the house? Any advice would be greatly appreciated.

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So What Happened?

Thanks for the advice so far. Keep it coming!
@ Hannah: Don't presume to know me and don't call me a liar. We do not have anywhere near the lifestyle we had when I was working. We have given up vacations, we have given up eating out, I shop at Aldi. Should I go on??? The cost of childcare for 3 kids would be more than I would bring home. Does that make sense?

More Answers


answers from Chicago on

While fixing debt with debt isn't the best solution, it certainly isn't the horrible thing some on here are making it out to be. You have to see what your interest rate on the cards is, versus the interest rate on the home equity loan. Right now I think interest rates on loans are about 3.5%. It's like they're giving away money for free almost. If your credit cards have higher than 15% like most do, then yes, it can be a good idea. You can make the same payments and pay off your debt much faster at a reduced interest rate. Also, you are right that you can deduct the interest on your taxes. Can't do that with credit cards! So yes, sometimes it does make sense like you are thinking.

However, you do have to live within your means and use credit cards only as a last resort/emergency measure. If you take out the loan AND continue to use your credit cards, that is where you will get into trouble. If you can't live without the credit cards, then perhaps you need to consider a way to bring in more money.

And P.S. I don't think Hannah was being kind at all 8kidsdad. She is wrong that it is always bad to fix debt with debt. And it was unkind of her to say this mama was careless. How could anybody presume to know that? She wasn't asking for a lecture on how to live her life. She was asking for advice on a home equity loan.

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answers from Washington DC on

hey Sweet!!

Go get a cup of tea or coffee - put your feet up - this will be a long one...sorry...

Borrowing from Peter to pay Paul isn't always the right solution...

If you can't live without your paycheck - you might need to consider going back to work until you can. It's not the BEST solution, but it is a consideration....you are already defensive about this (your rebuttal to Hannah was a tad harsh - you asked the question in a public forum) so you have to willing to take the good with the bad and hers wasn't bad...

If you are going to do this - an emergency fund of $1K isn't going to be enough. Sorry - we have six months of my husband's salary in savings and we've been utilizing it for 2 months while he was unemployed...

There are many "if's" related to this question.

If you are going to do this - you need to fix the debt problem. Not that you were living extravagantly but you were not living within your means - you did not adequately prepare for things....is that wrong? yes and no. you now have something to learn from. if you can't learn from this then you will only repeat it.

IF you are read to stop charging - you really have to back it up...we are a cash only family...no credit cards...and I can tell you from one who LOVES to spend - it is a VERY hard transition. VERY HARD.

If you are already living paycheck to paycheck - you need to talk with your mortgage company to find out if you even qualify for a HELOC (Home Equity Line of Credit) or a refinance...find out what you would be able to take out - this means getting an appraisal done on the house to find out what it is worth, pulling a credit report and finding out if you have a good enough score to lower your interest rate as well as pull money out. You might have to come to the table with money - sometimes up to $3K...can you do that?

So being a debt free/cash only family IS possible...it takes a LOT of hard work and restraint...can you do this? Yes. but you have to be realistic in your savings and planning...$1K is NOT enough for an emergency fund - as proven in your past history of charging...so make a plan and stick to it. DO NOT CHARGE...see what you can get through on your own...you might be surprised....

if you are going to do the refinance and pull money out - make sure you plan on staying in the house at least 5 to 7 more years.

IF you are going to do this - make sure you cut up all your credit cards and not use them for an "emergency" again...if the car needs repaired - find out how much it will cost to fix it and save for it. if you need a root canal - find out if the doctor will take payments...

See all the "if's"? Many questions that need to be answered by you and your husband...it can be done. but you have to be dedicated to leaving the debt behind...


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answers from Minneapolis on

paying off debt with debt is not the answer. And $1000 is not going to be anywhere near enough safety especially if you have a home and two vehicles or even just one vehicle.

you pay off the cards and have a new single payment due for the line of credit something comes up and $1000 doesn't cover it so you charge. now you have one large bill and a small bill and no more saving so...you start charging again :(

Interest in taxes is NOTHING, there is really no benefit to interest deduction like that.

What you really need to do is adjust your expenses to fit your income staying home...or go back out there and get a job.

And yes you did rack up this debt by being careless. You did not do your research into being a SAHM and now you are suffering the consequences. You can't just dump a job and live the same way you have previously you have to make sacrifices. This round you make the sacrifice of uncontrolled debt and it is goin to take a lot more work then just taking out a loan to fix it.

DONT "FIX" DEBT WITH DEBT. it makes no sense!!

2 moms found this helpful


answers from New York on

I've done this type of thing and refinanced from a 30 year to 15 year mortgage. The rates are so low that I now pay the mortgage + am paying off debt for the same amount as my previous mortgage only.

That said, I DO still use my credit cards but I also DO pay them off in full every month. I will not allow them to rack up. Credit card interest is such a waste of $$.

One big pitfall - by converting credit card debt to home equity debt, you do run the risk of jeopardizing your house if you cannot meet the payments. That is not the case with credit card debt.

You may want to consider first trying to conquer the credit card debt without resorting to the home equity loan. Attack the cards with the lowest balances first and pay those off, then tackle the cards with the bigger balances. See if you can get the interest rate reduced, as one poster suggested.

There were a couple good suggestions from other posters on ways to cut back further on your spending (grocery spending is a good place to start). Draft up a monthly budget and look for little ways that you can further cut back - even if it's only a few bucks here or there.

Good luck! I'm trying to get back on budget myself at the moment so I know how it feels. :)

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answers from Chicago on

As a former working mom that also quit to be a SAHM 2 years ago, I completely sympathize with everything you're going through. It's really tough to completely change income & spending habits and then having to plan for the "rainy day" on top of having half the income coming in!

My 2 cents, for what they're worth is PLEASE read Dave Ramsey's Total Money Makeover book before you borrow anything new! After having to borrow money from my sister just to make our monthly bill payments (after all, we had all those spending & credit bills coming in from when we had 2 incomes, but only 1 income to pay them!), I realized that we had to take a whole new look at our financial lives. We couldn't keep doing what we were doing because we would drown in our debts. It never seemed like we were making progress on paying anything down and we just couldn't get it together. A friend recommended this book and it has seriously saved our house, our cars, our sanity, everything!

For the past year, we have been strictly following Dave's "Baby Steps" to work towards getting debt free. We are nowhere near there, but we're so much closer than we would have been if we'd continued doing what we were doing (got 2 of our SIX credit cards paid off, with a 3rd one hopefully coming in the next 4 months!). After becoming a Dave Ramsey convert, I do agree, however, that borrowing new debt isn't a good idea to pay off old debt. My husband and I did that 3 times over the last 12 years and it never worked--hence the debt situation we got ourselves into (and the monster home equity loan we have on top of our credit bills that it was supposed to pay off, but they creeped back up because of those "unexpected" expenses or stuff we just "needed"). That's not to say it wouldn't work for you, but please just read the first couple chapters of this book and you might gain a new persective on personal financial management.

I, too, now shop at Aldi with pride, cook every night, no more vacations to Aruba (bummer!), cut down on cable & phone and we follow a strict household budget based on our learnings from Total Money Makeover. I read the book first and then my husband--he got through most of it on a plane ride for a business trip...it's a pretty easy-read.

Our "light at the end of the tunnel" is still about 2 1/2 years away, but that's way closer than the 7-10+ years we were looking at before!

Good luck to you on whichever path you choose!

1 mom found this helpful


answers from Los Angeles on

First, don't be so hard on Hannah. You asked for her opinion and she was kind enough to give it to you. No charge.

Second, you say your lifestyle is no where near what it was when you were working. Good ! But, from what you said, it needs to be reduced even more.

You said you are going from paycheck to paycheck. You should really be going from 90% of paycheck to 90% of paycheck. The other 10% is for savings. (Savings, not "unexpected expenses".)

I have found the quickest and easiest way to reduce the family budget is with food. Shop wisely. Cook from scratch. Learn what a really good deal is on the products you buy. Then, when you see something you use that is on sale, don't buy one, even if one is all you need right now. If its a really good deal, buy 6 or 10 or a dozen. That way you can eat on the sale prices even when its not on sale. Example, I use alfredo sauce. It normally is on the shelf for $2.99 here. But it goes on sale for $.99 every 3 months or so. When it goes on sale for $.99 I buy enough to last until the next sale. I'm able to feed my family for $25 per week per person. I could do less than $20 per person per week if I needed to. A friend's son is on the team at school and he is selling grocery store credit type cards. (We gave him $100 and we get back a store "credit card" with $100 on it and his sports program gets 3% to 5% of the $100.) I have used this one store almost exclusively for the past 6 weeks and still have $25 on it. So I've spent no more than $100 for the two of us over the last 6 weeks.

There have been numerous questions on mamapedia on how to save money and save at the grocery store. Look them up and read them.

If you need more help, give us or me (e-mail me) more details and I/we will be glad to help you. Good luck to you and yours.

1 mom found this helpful


answers from Washington DC on

I've done this. Was able to get a loan in 2005 with a fixed rate. Our options were a 15y loan for $900 a month, 20y loan for $700 a month or 30y loan for $450 a month. I said let's do the 30y for the low payment. Hubby said no the 15y so we're not paying on it forever. The $900 was about what we were paying in credit cards per month anyway so it won't be that hard. I gave in to the 15y. The problem with that was that because the payment matched what we were already sending out we didn't free up any monthly income. So we almost immediately had to start charging again.

Then in 2009 we lost our jobs. I had to cash in stock to keep up with the bills. I tried to refinance, the bank said no thanks. They did however let me re-term the home equity loan to 30y and bring the monthly payment down to $450. Hmm. That sounds familiar.

If I had stuck to my guns and gotten the original $450 we probably wouldn't be in the debt that we are now because we would've had $400 a month to do whatever or even send double payments if we wanted.

My suggestion to you is to talk to the bank about a 20-30y fixed rate equity loan. Do not even consider an adjustable rate. The rates are so low right now and adjustable rate would be foolish. They will offer you a 15y loan, but don't do it. Take whatever would get you the LOWEST REQUIRED payment. You can always pay extra without penalty when you're able.

As for when you sell your house - just make sure that the asking/acceptance price will cover the 1st mortgage as well as the home equity loan.


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answers from Dallas on

Another option, depending on the amount of credit card debt is to open another credit card with a 0% interest on balance transfers. This, of course, depends on the level of debt. My husband and I did this, and were able to transfer a majority of of debt to an credit card with 0% interest on balance transfers until March of 2013. We did have to pay a 3% of the amount transfer fee, but it's much cheaper than the interest it would accrue during that time. With credit cards, as you know, you have to be diciplined enough to make sure you pay it off in the time frame. Ours does not back charge us all of the interest like a store like Best Buy does, but at the end of that time the interest on the remaining balance goes to 7.99%. We opened it through Citi bank.

I would also look into a Home Equity Line of Credit before I did a loan. While you sometimes have to pay a closing cost on the line of credit, it gives you more flexibility and you only pay interest on what you use and can reuse it, where as a loan is a one-time payment.

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answers from Philadelphia on

I've seen people do this very thing, and just end up with more debt. So if you decide to do it, you've got to cut the cards up.

Nonetheless, it might be a good solution for you. Although, I'd suggest you try a credit counseling agency first. (This worked for me) They might be able to help you with paying down the cards. Again... you will have to cancel or stop using the cards.

I'm not sure about borrowing for your emergency fund, however. Even if you get a really good rate, you are still PAYING for that money. You could end up paying more interest than you even borrowed.

Good luck.

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answers from Houston on

First off, I would contact the credit card companies and see if the current rate can be lowered. If you have been with them a while and paying on time they will most likely work with you, it doesn't hurt to mention you will most likely be cancelling the card after it's paid off if they can't work with you (just saying it helps).
As far as the home equity line, several factors to consider one being how long have you been paying on your home? Because after the home equity loan, you are starting over from day one paying your mortgage. And if you forsee yourself moving in the next 5 years, even if it's a remote possibility I wouldn't take the loan. Good luck and hang in there, we've all been there.

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answers from St. Louis on

Most home equity loans are adjustable rate mortgages. In other words you are only locked into say 3.4% for a year. What that means in in a year, if the economy ever recovers you could get hit with 7 - 10% rate which really kicks up the monthly payments. This would be the same as the ARMs you have been hearing so much about.

I don't know what you first mortgage rate is but you would be better off refinancing that in a fixed 20 or 30. It will actually lower your payments more than than the home equity will plus it is fixed and you could be lowering the interest rate for your first as well. In other words it would be lowering more than just your credit card payments. Yes you can pull equity out when you refinance your first.

Oh instead of pulling money out for an emergency fund you could get a home equity line of credit. What that is is an open line of credit, like a credit card and like a credit card you don't have to use it to keep it. That way if there is an emergency you can access the line of credit, it has a lower rate than a credit card and this way you are not paying more interest on a loan than you are making on the money in your savings.

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answers from Pittsburgh on

I think you could do that with a few *rules and regulations* LOL
They are (not necessarily in order of importance):
#1. Commit to paying down the equity loan asap...not just the minimum per month, but literally, as fast as possible. If the minimum payment is ALL you can *afford* - forget it and do the debt snowball.
#2. Before you obtain the loan, cut up any & all credit cards (you will have your $1000 emergency fund, and keep building it.
#3. Before any other funding (401K, savings, stock investing, etc.) the equity loan needs to be paid off. Suspend 401K contributions if necessary to get this done asap.
#4. Repeat after me: "I will never use a credit card again--if I do not have the money, I don't need it.

Personally, I would do the debt snowball instead of the equity loan, but you can't do the snowball without first cutting up all credit cards.

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