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Old 09-08-2009, 12:22 AM
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Should taxpayers use a Home Equity Loan (HELOC) to pay off credit card debt?

While it may seem that taxpayers who are homeowners may find it considerably more difficult to tap into their "home equity" than in the past, it is still possible for some them to secure or tap into their home equity line of credit. Clearly, the credit market has tightened for many taxpayers and generally it is now much more difficult to obtain home mortgages and other lines of credit these days.

This is especially true today as the tightening of the credit market has been accompanied with a severe decline in home values in recent years. This has effectively left many homeowners with little or no home equity to draw upon! In this environment even the banks are rightly concerned about possible further deterioration in home values.

Despite these negative factors, many homeowners still retain a sizable amount of equity in their homes. This is especially prevalent in for taxpayers who do not reside in states like Florida, Arizona, Nevada, Mississippi and California, which have felt the "brunt of the housing market decline." These homeowners still retain untapped credit in their home equity lines of credit (HELOC), which is still available for them to draw upon. Thus, one is tempted to ask the question, “should taxpayers use their HELOC to help pay off their higher interest rate credit card debt?"

Advantages of paying off the credit card debt with a HELOC.
The two principal arguments proposed by financial planners who favor homeowners tapping into their HELOC to pay off high interest credit card balances are as follows;

1. First of all, a HELOC will very likely have a much lower interest rate than what many credit cards currently carry.
Currently, a HELOC may be have a rate of interest ranging from anywhere from 5.5% to 7.5% that is more than half the rate of interest that is currently charged on many credit cards (average ranging from 14% to as much as 22%). On a balance $15,000 or more, that represents a significant savings.

2. Homeowners can take advantage of deducting the interest expense from a HELOC on their personal tax return.
The interest expenses paid on “home equity loans” may be tax-deductable. Under the current tax law, a taxpayer filing a joint tax return can currentlydeduct the interest on up to $100,000 in home equity loans.

Disadvantages of paying off the credit card debt with a HELOC. The two principal arguments made by financial planners who do not favor homeowners tapping into their HELOC to pay off high interest credit card balances are as follows;

1. A HELOC is secured debt
Many taxpayers are not aware that their "credit card debt is unsecured," thus if a taxpayers were not able to pay it off, there's nothing the lender can do to you, other than report you as a bad credit risk! Whereas, in the case of a mortgage debt that includes a home equity loan or a HELOC, these debts are secured by the taxpayer’s primary home residence. Thus, if a taxpayer cannot make these repayments, the lender is entitled to repossess your home.

Some Financial advisors recommend strictly against using a taxpayers home equity to pay off credit cards as it encourages continued dependence on credit card spending. As the old adage goes, "someone who wipes out their credit card debt finds it too easy to start running them up again, after all there is a zero balance and a few small charges won't matter." Shortly thereafter, the taxpayers have run their credit card balances back up again and now are confronted with both dangers of credit card debt and a higher home equity loan that was not there before. Again, the taxpayer is deeper in debt!!!

2. Back into the credit card debt trap
This is how many homeowners got into trouble in the current housing crisis. Some people, it seems, are addicted to debt - they can't avoid the temptation of those seemingly insignificant purchases that quickly pile up into big balances on a credit card. For them, tapping a home equity loan doesn't so much provide them a way to get a handle on their debt as it does wipe the slate clean so they can start all over again! Only they're not yet done with their previous debts. If a taxpayer does tap into a home equity loan to pay off his or her own credit cards, one should consider cutting up these credit cards and to remove the temption to use these again especially for spontaneous purchases.

Financial experts actually advise that taxpayers to retain at least one credit card for emergency expenses, such as a major care repair or as a reserve while traveling.

In conclusion, tapping into a home equity loan or line of credit can offer substantial savings in terms of interest expenses and possible tax benefits for homeowners who are currently burdened with significant amounts of credit card debt. But, the homeowner who has tapped into their HELOC must exercise "strict discipline" in not getting tempted to make impulse purchases using credit cards and in fact should avoid using the credit cards altogether.

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