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If you have equity in your house, it can be a wise strategy to use a home equity loan to pay off your credit card debt. The interest you pay on mortgage debt is tax-deductible, up to $100,000, and mortgages typically carry much lower interest rates than credit card debt. But, caution: don’t pay off those credit card bills, and put your home at risk with an equity loan if you’re just going to go back out and run up your charge cards again.
The decision to take out a home equity loan is one that should not be made lightly. I believe that you should only use your home equity to pay off debt under two circumstances:
1) You got into credit card debt because of the Dreaded D’s (downsizing, divorce, disability, etc.) or some other personal disaster, like a business failure or lawsuit; and
2) The situation that threw you into debt has now been rectified. (For instance, you were downsized, but now you have a job, or you faced a disease or a disability, but now you’ve bounced back from your medical problems).
If you got into debt for other reasons of your own doing, such as overspending, and if you haven’t learned how to get those impulses under control, I urge you to refrain from tapping the equity in your home to pay off credit card debt. I’ve heard heart-breaking stories of people who paid off their credit card debts by converting those obligations into mortgage debt – only to keep spending, not change their financial habits, and ultimately wind up losing their homes in foreclosure. I don’t want this to happen to you.
The Financial Benefits of Owning Real Estate
Home ownership is critical to your financial security. In my third book, The Money Coach’s Guide to Your First Million, I pointed out that for more than 90% of all millionaires in the U.S., real estate is a cornerstone of their wealth. Owning real estate – either your principal residence and/ or investment property – has terrific financial advantages. You get tax breaks for paying property taxes and mortgage interest. You get regular income and can take a depreciation deduction for rental property. If you have a home-based business, the tax breaks are even juicier; Uncle Sam lets you write off a variety of expenses associated with running your business from the comfort of your abode.
As a homeowner, you also get the chance to enjoy price appreciation, something that’s happened — more often than not — with residential real estate throughout the country over several decades. For instance, in the first 39 years that the National Association of Realtors has tracked single family home prices, they went up every single year. Even in 2006, when the real estate market cooled off considerably, the price of the average single family home still rose by 1.1%, to $222,100. Needless to say, the housing market fell dramatically in 2007 and 2008. As of October 2008, real estate prices nationwide were down about 20% from their 2006 levels. For these reasons and more, you’ve probably heard it said that renting an apartment is simply “throwing your money away” month after month. I believe that it’s actually worse than that. It’s not just that you’re losing out on a multitude of financial incentives. Renting a home or an apartment puts you at a big disadvantage in other ways. Home ownership often affords you rights and freedoms that renters don’t have. For instance, you can paint the inside of your house any color you want, hang paintings on the wall wherever you’d like, or have a cat or dog if you so choose. If you’re renting, though, you have to get a landlord’s permission to do these things – not always an easy task. Home ownership also has considerable intangible benefits – like the pride you get from being a homeowner (don’t you love it when visitors compliment you on your beautiful garden?) or the sense of satisfaction you feel just knowing you’re setting a good example for young people and others who aspire to home ownership. Lastly, a home provides more than just a roof over your head each night or a meeting place for family gatherings. It can become part of your legacy – an asset that you own free and clear and perhaps leave to your children or grandchildren.
Unfortunately, too many people are using up the equity in their homes at unprecedented levels. That worries me greatly. Fifty years ago, Americans averaged about 85% equity in their homes, net of debt. Today that figure is around 57%, according to George Marotta, a NAPFA registered financial advisor and research fellow at Stanford University’s Hoover Institution.
Since housing prices have escalated so dramatically over the past decade, you’d think that Americans would have lots more equity in their homes, not a lot less. The problem is that people who lack proper money management skills are getting cash-out mortgage refinancing to pay off debts and make various expenditures. My concern is that at some point, many individuals will find themselves in situations where the homes that were keeping them afloat start to sink under a boatload of debts.
Next – Day 23: Apply for a Home Equity Loan or Equity Line of Credit (Part 2)
Related articles
- Why You Should Give Reverse Mortgages Another Look (askamoneyexpert.com)
- Paying Off Your Debt: How One Woman Paid Off $30,000 in Credit Card Debt (askthemoneycoach.com)
