Home equity loan - bad move?
Mr. Land
sharply, leaving us in a difficult position debt-wise.
We are pretty much keeping our heads above water, but have had to
continually tap into our savings to do that...and can't do it much
longer.
We have a house we bought for $270,000 that we believe is worth around
$420,000 now. The mortgage is around $2000/month (6.375% fixed). We
have some other debt as follows:
Auto loan: $500/month until 2006, personal loan (pool): $580/month
until 2007, and around $4,000 each on two credit cards.
We're considering a home equity loan to consolidate the above
non-mortgage debt (total around $40,000) to lower our total monthly
payments. The rep at our credit union quoted us about $450/month for
a 10 year loan, $770 for 5 year.
That represents a substantial savings in monthly payments, but I'm
wondering how much additional risk the home equity loan represents in
our case. I can see that if we wholly owned our home, the home equity
loan would represent clear additional risk, as if we defaulted we'd be
forced to sell the home to pay off the remaining loan debt. However,
since we still owe around $240,000 on the mortgage, if for some reason
we lost our ability to pay, wouldn't we be forced (by the mortgager)
to sell the home anyway? If this is true, does the HE loan represent
any additional risk?
Thanks very much for any help/opinions/advice...
John A. Weeks III
<graft...@yahoo.com> wrote:
> We've been hit by the economic downturn and our income has dropped
> sharply, leaving us in a difficult position debt-wise.
>
> We are pretty much keeping our heads above water, but have had to
> continually tap into our savings to do that...and can't do it much
> longer.
>
> We have a house we bought for $270,000 that we believe is worth around
> $420,000 now. The mortgage is around $2000/month (6.375% fixed). We
> have some other debt as follows:
>
> Auto loan: $500/month until 2006, personal loan (pool): $580/month
> until 2007, and around $4,000 each on two credit cards.
>
> We're considering a home equity loan to consolidate the above
> non-mortgage debt (total around $40,000) to lower our total monthly
> payments. The rep at our credit union quoted us about $450/month for
> a 10 year loan, $770 for 5 year.
I think you need to take a realistic examination at what your future
holds as far as income goes. Are you sure that this income downturn
is temporary? Or are you in an industry that has gone overseas or
has totally evaporated? Unless you are pretty sure that your income
will pick back up, adding yet another payment to the mix is a dumb
idea. The real answer would be to either increase income or reduce
expenses.
As far as doing a home equity loan to reduce your monthly payments
on existing debt, I am still a little iffy on that. It is never a
good idea to convert a short term debt into a long term debt, and
it is never a good idea to put your family home in risk. When you
are having financial problems, you don't need to be driving a
luxury car. Sell that puppy, and buy something that you can pay
cash for. If things get better, then you can buy another luxury
car when you can pay cash for it later on. To buy some time, call
all of your credit card companies and look for low fee/low rate
balance transfers. If you can get a 0% or a 2.9% for your credit
card debt, then do it--it makes little sense to put up your house
if you can do it with a balance transfer.
If your income downturn is a long term situation, then I'd suggest
selling the house and moving somewhere more sensible. You have the
potential to make a $150,000 profit on a $30,000 investment, which
is making 5 times your money. I'd take that deal any day of the
week. Selling your house will clear up your mortgage debt, eliminate
your monthly $2000 hit, and get rid of the pool loan. Combine that
with selling the luxury car and paying off your credit cards, you
could live somewhere in the country in a brand new home that is
fully paid for and still have cash in the bank.
-john-
--
====================================================================
John A. Weeks III 952-432-2708 jo...@johnweeks.com
Newave Communications http://www.johnweeks.com
====================================================================
Mr. Land
couple of questions regarding your response...
> I think you need to take a realistic examination at what your future
> holds as far as income goes. Are you sure that this income downturn
> is temporary? Or are you in an industry that has gone overseas or
> has totally evaporated?
I'm a software developer. Yes, a lot of work has gone overseas, but I
at least expect to hold my own at this point. I don't expect to ever
make the kind of money I did during the "bubble," but I don't see the
need for local software engineers totally going away. One never
knows, though, I suppose...
> Unless you are pretty sure that your income
> will pick back up, adding yet another payment to the mix is a dumb
> idea. The real answer would be to either increase income or reduce
> expenses.
>
I'm not sure I follow what you mean by adding yet another payment,
because unless I'm missing something (REALLY missing something), the
$450 or $770 monthly HE payment would REPLACE the existing
$500+$580+$200(approx)-per-month existing payments. So instead of
paying roughly $1280/month for 5 years (roughly the remaining length
on the car/pool loans), we'd be paying $770 for 5 years (or $450 for
ten.)
> As far as doing a home equity loan to reduce your monthly payments
> on existing debt, I am still a little iffy on that. It is never a
> good idea to convert a short term debt into a long term debt, and
> it is never a good idea to put your family home in risk.
My understanding is that if for some reason we lost the ability to
pay, we'd be forced to sell the house and pay off the remaining loan
from the proceeds. But, if that happened, we also wouldn't be able to
make our normal mortgage payments, so wouldn't we already be forced to
sell the home anyway? Sorry to re-ask but this is a key point that
I'd like to understand.
> When you
> are having financial problems, you don't need to be driving a
> luxury car.
I don't, believe me. But we do have our twin daughters in a private
Catholic school, which we really want to keep doing if at all
possible. I guess that's our "luxury car".
> Sell that puppy, and buy something that you can pay
> cash for. If things get better, then you can buy another luxury
> car when you can pay cash for it later on. To buy some time, call
> all of your credit card companies and look for low fee/low rate
> balance transfers. If you can get a 0% or a 2.9% for your credit
> card debt, then do it--it makes little sense to put up your house
> if you can do it with a balance transfer.
You mean the bank issuing my VISA is going to be willing to transfer
my $4000 @ 18% balance to a 0% account? That's amazing.
>
> If your income downturn is a long term situation, then I'd suggest
> selling the house and moving somewhere more sensible. You have the
> potential to make a $150,000 profit on a $30,000 investment, which
> is making 5 times your money. I'd take that deal any day of the
> week. Selling your house will clear up your mortgage debt, eliminate
> your monthly $2000 hit, and get rid of the pool loan. Combine that
> with selling the luxury car and paying off your credit cards, you
> could live somewhere in the country in a brand new home that is
> fully paid for and still have cash in the bank.
That does sound pretty good...unfortunately, for the same reason that
our $269,000 home is now worth $420,000, we'd have a hard time finding
even a starter home for $150K in our area.
Thanks again for being generous with your time and giving us some
suggestions.
John A. Weeks III
> > When you
> > are having financial problems, you don't need to be driving a
> > luxury car.
>
> I don't, believe me. But we do have our twin daughters in a private
> Catholic school, which we really want to keep doing if at all
> possible. I guess that's our "luxury car".
You say that your car payment is $500 a month, and I recall it
being for at least 3 more years. That car had to have cost at
least $20,000 to have a monster car payment like that. One can
buy a nice Hyundi 4-door sedan family car that gets good gas
mileage and has a 100,000 mile warranty for around $12,000. Buying
a car that costs about double that fits my definition of a luxury
car to a tee. Car dealers and car ads on TV go to great lengths
to try to convince people that they have deserve all these expensive
cars, but the fact is that anything above basic transportation is
a luxury that is supposed to be optional, not a basic human right.
> > car when you can pay cash for it later on. To buy some time, call
> > all of your credit card companies and look for low fee/low rate
> > balance transfers. If you can get a 0% or a 2.9% for your credit
> > card debt, then do it--it makes little sense to put up your house
> > if you can do it with a balance transfer.
>
> You mean the bank issuing my VISA is going to be willing to transfer
> my $4000 @ 18% balance to a 0% account? That's amazing.
Yes. There are two scenarios.
1) call your credit card company, tell them that you have a better
offer, and that you are considering closing this account. Many
companies will sweeten the deal to keep you on board, especially
if you have a clean credit history.
2) most Americans have about a dozen credit cards. You likely
have a few that you are not using. If so, call all of these companies
and offer to transfer your balance and to use their cards if they
will cut you a nice deal on a balance transfer.
You would be amazed at what you can get just by asking.
> > If your income downturn is a long term situation, then I'd suggest
> > selling the house and moving somewhere more sensible. You have the
> > potential to make a $150,000 profit on a $30,000 investment, which
> > is making 5 times your money. I'd take that deal any day of the
> > week. Selling your house will clear up your mortgage debt, eliminate
> > your monthly $2000 hit, and get rid of the pool loan. Combine that
> > with selling the luxury car and paying off your credit cards, you
> > could live somewhere in the country in a brand new home that is
> > fully paid for and still have cash in the bank.
>
> That does sound pretty good...unfortunately, for the same reason that
> our $269,000 home is now worth $420,000, we'd have a hard time finding
> even a starter home for $150K in our area.
That is one of the reasons that U-Haul is such a successful company.
You go there, rent a truck, and haul your stuff someplace where
housing is cheaper. For example, in my home town, you can buy a
brand new 3 bedroom house complete with landscaping and applicances
in a brand new subdivision for $119,000. Why live in some bug-infested
rat hole for $500K on the west coast or near Boston when you can get
a brand new luxury home in the crime-free midwest for 1/4 the cost?
You could do the same kind of work in Kansas that you do on the
left coast. They have airplanes in Kansas, in fact, they build
lots of them there. The key to thriving in the new 3rd world
America that Bush has created is to think outside of the box.
tragicallyhip
JUST HAPPEN THAT ARE BEYOND OUR CONTROL AND WE ARE FACED WITH
DISTASTEFUL DECISIONS TO KEEP OURSELVES AFLOAT. FROM YOUR INFO YOUR
HOME REFI REPRESENTS ONLY A SMALL PORTION OF YOUR TOTAL HOME EQUITY,
SOMETHING, IN A PINCH, YOU COULD EASILY COVER BY SELLING YOUR HOME.
HUNT FOR THE BEST HOME EQUITY DEAL YOU CAN GET THEN CONSOLIDATE YOUR
DEBT, AS PLANNED, AND PRAY FOR BETTER TIMES. SHOULD YOU GET "SHORT
COCKED" IN THE END, YOU STILL HAVE SUFFICIENT REMAINING EQUITY TO GET
BACK ON YOUR FEET.