Home Equity Consolidation: I Finally Paid Off All My Debt!
I’ve spent years working with people over the course of my banking career that get themselves in trouble with debt and creditors. Life is motoring along at a nice pace until something traumatic happens. For one reason or another, their monthly expenses exceed their monthly income which becomes unsustainable.
Then it happens. They have a brilliant flash of genius. As if they’ve never even considered it, they decide to “Do” a home equity loan to pay off all their debts. They figure since they’ve been able to grow the equity in their home, why not leverage it to pay off all of their debts.
Here are 5 of the mistakes I’ve seen over the last 15 years…
1. The Goal is to PAY OFF Debt – Beware of that statement. When consolidating debt through the use of home equity, you are in fact “paying off” a set of creditors. That is true; however, you’re also increasing your loan on your house. This is no different than using one credit card to pay the balance on another. Oh, it feels great at first because of the huge savings on the monthly budget. Cash Flow relief happens and you feel like a genius. Here’s the reality. You are only RESTRUCTURING your debt! You still owe it, now at a much higher cost usually over 15 – 30 years.
2. No After Pay Off Plan – Too many clients think life can go back to the norm once they have their monthly cash flow relief. When I’ve consolidated my client’s debts using a home loan, I give them all a plan. The people who have a plan do really well accelerating the payoff on their homes or they increase their savings for other goals. The ones without a plan are usually in a worse position with more debt inside of 12 months. These folks are addicted to consuming their lives. Debt provides a way to do just that.
3. They Believe Home Prices Will Always Rise – Historically, it is true, home values do rise over long periods of time. Unfortunately, our country is in one of the worst Equity Blood Baths in history. Home Values across the country have nose dived for the last 3 years. My personal home lost over $60,000 in value the first year. It will take a long time to recover from that loss. Because of the short term spike in Property Values from 2003 – 2007, too many people have a false sense of security in their values. This property value correction will take several years to correct itself, so don’t hold your breath there.
4. Buying Decisions Are Based on Monthly Payments – This is a huge mistake I see. Too many people get trapped thinking if they can afford the payment, they can satisfy their want in the moment. 90% of the things we buy, we can live without. Marketing firms earn HUGE dollars every year getting us to buy their products. They want us to see that $499 per month can buy luxury and elegance in that new $25,000 car. You deserve a bigger, nicer home than the one you have now. After all, they say a bigger home creates a happier family. These are all Emotionally driven and Psychologically Engineered buying decisions. The next time you want a car, make sure you have a minimum of 50% down payment and 100% if possible. You work hard for your dollars. Don’t sell yourself into slavery with the creditors.
5. Got Plenty of Time to Pay it Off Again – Our society has taught us all about the debt cycle, but we don’t know we’re in it. Imagine, you’re out of college (if you went) with student loans and some credit card debt (80% of college graduates have in excess of $10,000 in debt). You get your first real paying job. Now with all this extra income, you decide to buy a new car. Somewhere around 26 you realize you want to pay off all this debt, so you tighten your belt and pay most of it off. Over the next 5 years you get married and have your first child. You need a house and a bigger car. A few more credit cards, student loans, a house payment. But then in your early 30’s you and your wife decide it’s important to pay off the debt, so you spend the next 5 years paying things down. Then in your late 30’s you’ve got 2 more kids and space is getting cramped. Time to upgrade to a bigger house and bigger car again. In your early 40’s you realize you don’t have any retirement savings, but your debt load is too high, so you take out an Equity loan to consolidate. It frees up some monthly cash to start the savings plan, but the kids want to go to college so you take out more debt to send them to school. You get the picture. At some point you’ve got to realize that Time is the one precious thing that will work for you or against you. You cannot get it back.
Home Equity is a great source of money to use if you are in a situation that requires drastic measures to get out of. If you so choose to go down this path and restructure your debt, make sure you’ve got a plan on what After Consolidation life will look like or you’ll end up in a worse position.
Bio: Joshua Christensen is committed to Faith, Integrity, Trustworthiness, Abundance & Boldness. Living life on purpose, he is a devoted Christian, Father and Friend. He is a Small business Owner running his own Southwest Funding Branch, a speaker, and a published author to “Consider the Ant: 3 Keys to Biblical Prosperity.”