Is it a wise move to pay off a credit card with an int rate of 13% that has a $4500 bal with a home equity?
May 12, 2010 by
Filed under home equity rates
The home equity has an interest rate of 3.5%
May 12, 2010 by
Filed under home equity rates
The home equity has an interest rate of 3.5%
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Makes sense.
Only if you have the ability to pay this $4,500 down in a reasonable amount of time. The 13% rate is probably costing you $50 a month in interest (give or take). Dropping it down to 3.5% has the potential to lower it to just $13 a month (plus that interest might be tax deductible). So far, very good.
Where it gets dangerous is home equity lines actually put your house on the line for debt that is right now unsecured. So, if there is some problem with your income and/or budget and you stopped paying the cc company, the worst that would happen is they would cut off your credit card and maybe take you to small claims court to collect. If you can’t or don’t pay the HELOC, they can foreclose on your house.
So, I would do it to save on the interest, but I would also make aggressive payments on it so it gets paid down in a quick amount of time. If you can pay $400 a month toward the HELOC, you will have this gone in less than a year.
You might also want to look for a 0% balance transfer card and transfer it there to pay it off within a month.
Once you do have the card at a $0 balance, only use it for expenses you can pay in full every month, so you don’t get stuck paying interest again.
If you are simply trying to reorganize your finances, then yes. You will save a lot in interest fees over the life of the loan.
If you want to do it to help make ends meet then no. If you can’t pay the few extra dollars each month then you shouldn’t put your house up as security for an unsecured debt.
If you do pay it off with a HELOC then you should really consider cutting the card up. Credit cards make it very easy to go into debt quickly with little consideration of the consequences.
While it may make sense from an “interest rate” point of view, it really doesn’t make sense from an “intelligence” point of view. The reason I say that is because when you pay off a credit card with an equity line on your home, you have paid off unsecured debt with secured debt. What that means is that you have taken debt that you have promised to pay by your word and signature and turned it into debt that is “secured” by your home. With a credit card, if you default, the credit card company can take you to court and get a judgment for the money. they may even be able to garnish your wages or get money from your bank account. But with an equity line that is secured by your home, if you default, they can put a lien against your home or even, possibly, force the sale of your home to get paid. It is much better to just pay it off from your income. Here is a plan that will help you.
What keeps most people in debt is the fact that they keep spending more money than they make. They look at the “monthly payments” instead of the total debt loan that they are carrying. People need to stop spending now and concentrate on becoming debt free. Please do not consolidate or use a debt reduction company . It is not free, they will lower your payments by increasing the length of time until you are debt free, and you will take a hit on your credit score. Or they negotiate your debt down after telling you not to pay for awhile adding another hit to your credit score. Student loans are the only debt that can garnish your wages for non payment without taking you to court first. Just list them out on a piece of paper or a spreadsheet and follow the plan. If you work the plan, the plan will work for you.
A. Have a garage sale and sell anything that you no longer need or want.
B.Get a temporary part time job, if you have one, get another.
Here is a plan that can help you. If you work the plan, the plan will work for you:
1. Make a budget. Make the budget a week before you get paid. A budget is not a punishment! It is a tool which will free you from ever having to worry about money again. Put everything in your budget. Especially those annual, biannual, or quarterly bills like car registration, insurance, etc. Give every dollar you are going to bring home the name of where it is going. Add an “emergency fund” category to your budget for 25 dollars and save up until you have 1000-1250 dollars. Your emergency fund will help keep you from getting into new debt because of an emergency. If you can, set up a direct transfer to a savings account for your emergency fund. That way it moves automatically and you don’t even have to worry about it. You must cut your spending and live on less than you make.
2.First get current on all of you debts and make no more late payments. Stop using your credit cards immediately. Do not take on any more debt. Credit cards are like quicksand only the death is much slower. Make a list of all of your debts in order of highest interest rate to lowest interest. Use cash only for your spending from now on.
3.Pay the minimum due on all of your debts and then put your extra money towards paying off the highest interest one first. After you get that one paid off, you put the money you were paying on debt #1 (the minimum payment and the extra payment) towards debt #2. That will pay debt #2 off faster. When that is paid off, you put all three payments towards card #3 and that one will be paid off pretty quickly. As an example:
To start :
Debt #1 (highest interest): minimum payment+ extra payment
Debt #2 (middle interest): minimum payment
Debt #3(lowest interest): minimum payment
Debt #1: paid off
Debt #2: minimum payment from Debt #1+ Minimum payment from Debt #2 +extra payment
Debt #3: minimum payment
Debt #1: paid off
Debt #2: paid off
Debt #3:Minimum payment from card #1+ minimum payment from Debt #2+ minimum payment from Debt #3+ extra payment.
That way, you will get them all paid off, on time, and pay the least interest. It will also help towards rebuilding your credit since you will no longer have any late payments. This works no matter how many different debts you may have.
4. After you get all of your debts paid off, add to your emergency fund until you have 6-12 months of income saved up. Put that emergency fund money into a liquid money market fund or into a Bank of America no-risk CD so that if you need the money you can take it out without penalty.
5a. When you have your emergency fund in place, add a category for “fun” to your budget. Save for a holiday, a vacation, a big screen, or dinners out, whatever goal you want. Remember to enjoy your life.
5b. When you have your emergency fund in place, start saving for your retirement. Join the 401(k) plan at work and contribute the maximum. Your employer probably matches at least part of your contribution so why give up free money? Open a Roth IRA and contribute the maximum on a monthly basis. If you star
The APRs sure make this sound like a win.
But it is seldom a good idea to exchange unsecured debt for secured debt.
Probably the only exception is if you’ve long since put the nail of the coffin of incurring new credit card debt.
The sad reality is this:
1. Surfing the debt leads to a feeling of accomplishment.
2. Lowered interest rate leads to a sense of lightened burden in your home.
3. These two add together to create increased spending.
4. Hello new credit card debt.