Consolidating Debt with an Equity Line of Credit
Consolidating debt with an equity line of credit is the kind of thing people do at times when real estate values are rising. These are the periods in economic cycles during which people seem to get caught up in trends and very often make the wrong decision followed by the wrong moves which leads into financial ruin.
Paying off current credit card debt using a home equity line of credit may have very strong benefits, and since the new rate is more than likely mush lower than credit card rates the effect on cash flow can be dramatic.
However what happens very often is the fact that the borrower feeling good about the new cash flow sets out to spend more and starts running up credit card debt which resulting in high credit balances and payments once again.
That is the sort of thing that the then Federal Reserves Chairmen Mr. Greenspan described as; using the home like an ATM Card.
Fact of the matter is that if you do have a high credit card balance and the market conditions lend themselves to obtaining an Home Equity Line of Credit then by all means do but be prudent and start making larger than minimum payments on the credit line, baring in mind that minimum payments are based on interest only.
In conclusion obtaining a home equity line of credit in order to consolidate other debt may be be a good idea, so long as you bare in mind the essential fact that spending beyond your means was the fact that necessitated this move and you set out change your spending habits and treat the new credit line like a wise financial planning tool rather than an opportunity to spend even more.
The worst mistake often made is to payoff a car loan using an equity line of credit. This will reduce the payments dramatically but you will now be making small interest only payments rather than paying off the actual debt. Treating this scenario as a financial planning tool would be to pay off the car loan but continue making the same payments on the equity line.