Davemuti’s Weblog

Should you use your home equity to consolidate your debt?

Now I know that mainstream financial writers and planners will disagree with my advice in this lesson but I don’t care what the “mainstream” thinks. My goal in the advice I give my clients and people who read what I write is: How can I improve their financial well being? Remember, Carrying Debt Prevents You From Saving!

If you own a home and you have significant credit card debt it may make sense for you to tap the equity that has built up over the years and consolidate your debts into one payment. This approach will often reduce your monthly obligations and possibly increase your tax deductions. A strategic refinance to consolidate your debts can also free up cash you can actually invest towards your retirement. Now, you might be thinking you are simply borrowing from Peter to pay Paul and that you are actually extending the overall cost of the credit card debt. But are you really? Here is an example of one of my clients in their 50’s (we’ll call them Mary & Tom) we helped out of this exact situation.

Mary and John had run up some significant debt on several credit cards and were recommended to us by their accountant. Like for many of us, life had gotten in the way and over the years they had amassed $35,000 in credit card debt in addition to 3 mortgages. They had no retirement savings. With an average interest rate of 23%, you can imagine the minimum payments were killing them. We were able to structure a program for them that reduced their overall monthly payments by $1,260 – that is more than $15,000 per year and Mary and John now have positive cash flow every month. We set them up with a financial planner who in turn instituted a methodical contribution plan setting aside half of this monthly savings for their retirement, while the other half goes into a fund to pay for sudden expenses. Once this fund reaches a cash equivalent of six months reserves to pay all their expenses should they lose their jobs this half will then get re-directed to their retirement accounts. They are able to enjoy life again knowing they are not drowning in debt, they have money available for emergencies, and their retirement planning is now on track to attain their goals.

This post is an excerpt from Chapter 12 of my book entitled, Mortgages: What You Need to Know