In the last decade or so, there’s been a large glut of capital that banks have had. In response, they have come up with new and creative types of loans to try to get people to borrow more money. One of the most successful and prevalent types of these loans is a home equity loan, which is sometimes referred to as a home equity line of credit. In nearly all cases, home equity loans are not a good financial product to buy.
A home equity loan is nothing more than a second mortgage on your home. You are borrowing money and using your home as collateral. If you don’t pay the loan, they’ll take your house. It’s as simple as that. There are also home equity lines of credit which is the equivalent of a secured credit card that’s backed up with your house as collateral.
Home equity loans are often pitched to consumers as a way to “pay off their debts.” They contend that you’ll save thousands in interest payments on your high-interest consumer debts, and they’re right. The problem is that home equity loans are nothing more than a Band-Aid solution. You’re simply moving your debt from credit cards, car loans, and other lines of credit onto your home equity line of credit. You’re not paying off any debt or making something magical happen to eliminate your debt. The debt’s still there, as are the over-spending habits that got you into debt in the first place.
It gets even worse since before if you couldn’t pay your debt, the credit card collectors could just yell and scream at you. It wouldn’t be a fun process, but at least you’d keep your house! If you don’t pay your home equity loan debt, they can foreclose on your home and take it from you.
After most people get a home equity loan and move their debts onto it, they go out and charge up their credit cards and other credit lines again because they were paid off, have zero balances, and still had their nasty over-spending habits. A year later, they have huge credit card balances again, but this time they can’t move it onto a home equity loan.
Home equity loans are not a solution for people who have a lot of debt. There are certainly some instances when home equity loans might make sense to help you along the way as part of your crusade to completely get out of debt, but most people don’t treat them that way. When they get a home equity loan, they feel that they’ve done something to take care of their debt and that the problem really isn’t there anymore, but that’s just not the case.