When a home equity loan is not the best choice

When a home equity loan is not the best choice. Being in debt and not knowing how you’re going to pay your loans is a difficult situation to be in. However, no matter how dark and hopeless it may seem there are options for you to choose from. Today’s current economy is causing many people to default on their home loans and lose their houses. Even though this is always a possibility when you take on a mortgage, what can you do to avoid it? Or maybe your situation is different. You can afford your home loan or mortgage, it’s the credit cards and car loan that is keeping you awake at night. What do you do?

Many articles on this site deal with what to do when in serious debt you cannot seem to cope with. We have talked about, debt consolidation, refinancing, reverse mortgages and of course the main theme of our article today, home equity loans. In this article we are turning the concept on its head. When is home equity loan not the best choice. By doing this we will attempt to have a better understanding of the consequences, pros and cons of home equity loans which will help us to know when and why to choose which option.

To organize the article we will ask two questions that will elicit the reasons why home equity loan might not be the route to success in a certain scenario.

How much do you owe? If the loans you can’t deal with are relatively small in comparison to your equity you might do well to think twice. For example, say your debt is in the thousands or low tens of thousands of dollars, and your equity is high, one or two hundred thousand dollars. Home equity loan might be a little of an  overkill. Like killing cockroaches with atomic bombs, you might get yourself hurt and still have cockroaches to deal with in the nuclear winter. It is much better to take your slipper and wack them on the head.

What is your debt on? Debts are not all the same. Debts on credit cards are not the same as debts on your house. Why? There is less at stake. If you don’t pay your credit cards well you will be penalized. But if you really can’t meet the payments they will never be able to force you to sell your house. If you owe on your house they definitely can! Obviously we are not encouraging not paying your debts. Doing that is not only immoral it also is counterproductive, your credit score will drop to sub-zero levels. However sometimes situations escape out of your control, it is much better to have a negative credit score and a place to live in, than a negative credit score and living under a bridge. You do the math.

In a nutshell home equity loans can be a great solution to your debt problems. But ask yourself, do you really need to put your home at risk to pay this loan?