I couldn’t help but notice there have been a few articles circulating around espousing the merits of taking a home equity loan out to pay off your high interest debt or other types of unsecured debt. Did you look to see that they are written by mortgage brokers?
Here is my problem with consumers taking out these types of loans. One, they are attempting to borrow their way out of debt, which is impossible and overall, just a terrible idea. Secondly, they are borrowing from what is essentially the savings account of their home equity. For most people, this is their single biggest investment and financial asset. So, this loan to pay off unsecured debt is secured by the roof over their heads which costs more each month when a loan is taken out against it.
Here is a worst case scenario that is all too common you might envision before taking out one of these types of loans. You get a bigger house payment with the borrowed money, your credit cards get paid off but you don’t cut them up. Six months to a year later, you have them maxed out again but now you get laid off. The cards may never be paid and you have all the credit problems associated with being unable to pay them along with a higher mortgage payment. If you can’t make the payment on it, you are in more danger of losing your home than you were before you took it out. But most tragically, you have nothing to show for the thousands more you now owe on your home. Thousands you may have spent years paying down from the original debt.
Even in the best case scenario, you are now years longer away from paying the house off and if you pay off the cards and cut them up, you have less equity in your home in exchange for items you bought with high interest credit cards. In my opinion, it is a bad trade and
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