debt

Home equity loan to pay off vehicle debt?

Steve BucciQuestionDear Debt Adviser,
I am a single 23-year-old and own my own home. My father is a contractor and built my house at cost in 2005, so I have approximately $80,000 in equity. I have made some bad choices when it comes to money in the past, am pretty much drowning in debt and living paycheck to paycheck.

I have done a little research on home equity lines of credit and second mortgages, but am not sure if this is the right approach. I have two vehicles and a motorcycle as well as credit cards in my name with an average of 12 percent interest or higher on each, which is killing me. If this is a good approach, I would want to take out an equity line to cover the three vehicles as they are the highest interest rate and payments monthly. Any advice would be appreciated to get me back on my feet and to have money to save and not be living such a stressful life at such a young age ... but I guess it's better to be young and learn than to be older and not have time to correct it.
-- Amanda

AnswerDear Amanda,
If you grew up with a building contractor, you are probably familiar with some building concepts. One that comes to mind is that any building needs a solid foundation. Without one, whatever you build will come crashing down. So, before you rearrange your debts, I suggest you shore up your financial house's footings!

The first foundation repair I want you to make is to stop spending more than you take home. This is basic to any successful financial blueprint. Next, I want you to begin to save money for emergencies. Yes, the dreaded "six months' of expenses emergency savings account." Without savings to fall back on, you will always be in debt as life presents you with one surprise after another.

The Debt Adviser's quick tips
  • Work within a plan.
  • Spend less than you earn.
  • Dump two of the three wheels.
The best way I know of to control your spending and save at the same time is through the use of a spending plan. Don't roll your eyes! This really works and here's how you start: Track what you spend for four weeks. If you're a blogger, go ahead and do a spending blog. If you are on Facebook, put your results on your wall. You'll get help from friends and more encouragement than you can imagine. Once you know where you are spending your money, you can make decisions on whether you would like to continue spending in the areas you are or make some adjustments. This will get you in control of your finances so you can make future money choices that work for you, not against you.

I understand that life is short and you feel the need for speed, but three vehicles are two too many. I suggest you consider selling all but one of them. You may be upside down (owe more than what the vehicle would bring in at sale) in your loans for these vehicles. If that is the case, you would need a plan for paying the difference in what you owe on your loan and the sale price of the vehicle. One option might be to use an equity line of credit if your spending plan says you can afford to pay it back, not just carry it forever!

There are two last things I'd like you to keep in mind if you consider a home equity line of credit, or HELOC. First, the loan is secured by your home and increases your risk of trouble if home prices drop further and you want to sell, or if you lose your job and can't afford the extra payment. Second, it is common for people who consolidate their debt with a HELOC to continue to accumulate debt and end up with a lot more debt than before the HELOC.

The HELOC may work for you, but only if you are building on a sturdy and workable plan. Ask your dad, the contractor; I'll bet he knows about building from the ground up!

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