Board Topic: Home Equity and structuring debt
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Home Equity and structuring debt

Posted by: Deb Oct 31 2003, 01:25 PM
OK - Let me start by saying i have read your disclaimer. I'm a sponge in search of any tidbits of info right now, here's my situation:

Single full-time working mom.

Homeowner with $100k equity, mortgage payments manageable on current mortgage.

Other debts:
0% interest on a $4,000 purchase of bedroom furniture for Mom and child
0% interest for 6 months on $10,500 window purchase for home
$5,000 for roof being replaced within next 6 weeks, another $2,000 for gutters
$2,800 on one other credit card, 12.99% interest (pay approx $300 mo on that one)

Have a leased vehicle costing approx $375 a month, as well as student loan $8k

OK - now for the questions:

I applied for a home equity loan - my thought processes:
1. In case I lost my job
2. Move the roof/windows onto the home equity loan.

Does it make sense to put anything against my home? According to the lender, only required to make interest payments. The more I borrow the less the interest is, if I move over the roof, windows, gutter, the current tier would be 4.5%.

When and how does one determine when debt position is too much. I'm struggling with my current stand (emotional only) and feel guilty getting the work on the home done. I decided against siding (have cedar shakes), and am doing the required roof (is leaking) and windows because they leak as well. What are guidelines for when does one decide its OK to live and sometimes have to have debt? I have accepted the fact unless I remarry, or some stroke of luck - I will never be one to have 'extra' money. I live paycheck to paycheck and am making a manageable life for my family.

I have been very careful with the spending, and every income tax refund I get I typically pay down debt if any. The one credit card has balance due to some medical work for my child (which should get refunded) and other misc necessities.

I feel I am overwhelmed, but really may not be. Would appreciate any any any guidance you can point me to.

Thanks so so so much!!! unsure.gif

Posted by: loanuniverse Oct 31 2003, 02:30 PM

I am not a debt consolidation expert, but this much I can tell you just using common sense and my knowledge of lending and interest rates.

- A debt consolidation loan works as long as you don’t end up incurring more debts on top of the ones that you have consolidated. I have friends that have consolidated their debts either by refinancing their first mortgage or taking on a home equity loan, and sadly one of them told me the other day that her credit card debt was already over $10,000. This is only a year and a half since she consolidated and is not a good position to be in. I am not saying this is the reason why you are in this position as most of your debts seem to be related to repairs, but always keep that in mind.

- The two big items for which you have spent money already have a nice 0% interest rate, but I am sure that it will convert to a much higher rate after the grace period ends, moving them to a rate of 4.5% prior to that date would be a good idea.

- 12.99% on the credit card balance is too high!

The decision of consolidating into a home equity loan makes sense if you are going to pay less in debt service that you currently are paying. This seems to be the case in your situation. Of course the big negative is that your house will now be on the line for that debt in addition to the first mortgage and that if you default then the house is at risk.

You asked me When and how does one determine when debt position is too much? I think you are looking at this the wrong way, you already have most of the debt, and the expenses associated with the roof and the gutters is something that has to be done. Therefore, you have to approach it as: I am in this situation, how can I make it better?

If I were on this situation, I would: {this is me talking about what I would do, I really hesitate saying these things to a single Mom asking me for advice about getting a second mortgage on her house no matter how many disclaimers you have read, but what the heck, you are a grown woman}

1- Make sure to get all the information about the structure of the loan. You said interest only, which is great, but: For how long? Is the rate fixed? Is this a loan or a line? Is there an amortization? Prepayment penalty?

2- Put everything including the credit card balance in the loan. Do not use that card unless is an emergency.

3- I now have 3 loans { a first mortgage, a home equity loan, and a student loan} In addition, I have a car lease payment. My job is to get no more debt.

4- Since I have three loans, which one is the one costing me more money of the two that are secured by my house? Pay down the one with the highest rate when you get money such as the medical reimbursements do not spend this money, not even if it is Christmas…. Ok spend a couple of hundred for Christmas, but that is it

Good luck and I hope this helps.

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