Originally published March 26 2005
More people using home equity loans to pay off credit cards
by Mike Adams, the Health Ranger, NaturalNews Editor
Many consumers who want to get rid of their high-interest credit card debt are turning to lower-interest home equity loans to pay off their balances. However, some credit counselors are worried by this development, as missing payments on a collateralized loan, such as a mortgage or home equity loan, can result in losing the home. Compared to simply having a bad credit rating, this method for paying off credit cards is a serious gamble.
Jim Hamilton made a late-year resolution to get rid of his credit-card debt.
In December, when he refinanced his mortgage through ACA Mortgage in Wilmington, Del., Hamilton borrowed an additional $15,000 to pay off debt he was carrying on five credit cards.
Rates on his cards ranged from 12 percent to 20 percent, while his mortgage is fixed at 7 percent.
He'll also be able to deduct the interest he pays on his mortgage on his tax returns.
Hamilton is among thousands of people nationwide who, during the past several years, have replaced high-interest credit-card debt with relatively low-interest mortgage or home-equity borrowing.
A recent study released by New York-based advocacy group Demos said that the wave of borrowing is eroding the ownership stakes, or equity, of homeowners.
Americans own less of their homes today than they did in the 1970s or 1980s, according to Demos, which estimated that the average American homeowner's equity has fallen from 68.3 percent in 1973 to 55 percent in 2004.
Ed Mierzwinski of the Washington-based Public Interest Research Group said that he recommends against paying off credit cards with a mortgage or home-equity loan.
He said consumers must recognize that they are pledging their homes as collateral when they take out a mortgage or home-equity loan, a key difference from credit-card debt, which is not collateralized.
Clare Crossan, president of ACA Mortgage in Wilmington, said that she doesn't anticipate a slowdown in the use of borrowing against homes to pare credit-card debt.
Gerri Detweiler is a Sarasota, Fla.-based personal finance commentator and author of The Ultimate Credit Handbook.
She said she recommends consumers proceed with caution when replacing card debt with home debt.
Otherwise, if housing prices in your area decline, you risk owing more than your home is worth.
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