Home Equity Loan

The Home Equity Loan as a Debt Consolidator

You can borrow against the equity in your home as way to pay off your unsecured debt. This can be dangerous!

This debt solution will take unsecured debt, which could have possibly been resolved more fairly through bankruptcy, or most certainly been reduced through debt settlement, and trade it in for equity in your home. The banks know they cannot do much about collecting unsecured debt, so they are quite willing to offer you a home equity loan.

If you default on your credit card debt, which is unsecured debt, at the very worst, the creditor can sue you and obtain a judgment. With the judgment, they can put a lien on the house, so that when you sell your house, you must pay the lien. But they can’t force you to sell your house. When you have converted your unsecured debt to secured debt with the home equity loan, they can force the sale of your home if you are unable to pay your loan.

For example, a few years ago, with the real estate surge, banks were pre-approving home-equity loans greater than 100% of the home’s value, and sending out offers daily to homeowners, encouraging the lucky recipients to consolidate credit card debt. Essentially this converted unsecured debt to secured debt in the form of their home.

I could have wall-papered my house with these offers, as I got them daily! I believe this was a strategic maneuver on the part of the banks after they had been showering consumers with 0% or low interest rates, no fee credit card offers for years, and many people had racked up debt on those cards. So, as the debt deluge was mounting, along comes the banks to the rescue with an offer of relief via the home equity loan! Diligent consumers were eager to relieve themselves of the burden of debt, and it seemed like an easy debt solution.

But it also converted their unsecured debt into secured debt, which left them with little option later on to resolve or reduce that debt if they could not get control of their finances. At worst, they could lose their home and all the equity they had in it at one time. And here we are today, with many home foreclosures going on!

At the time, I didn’t know better, and I would have taken the offer. I wanted to consolidate my debt and repay my credit cards, but as I was going through a divorce and settling up property, including the home, I could not take out a home equity loan. Today, I would certainly know better, and would never advise anyone to take out a home equity loan to repay credit card debt.