| Ready To Consolidate That Debt?
IF YOU'RE A homeowner saddled with debt (and we're talking about bad, high-interest debt like the kind you pile up on credit cards) then Alan Greenspan has offered you an escape route. How so? Well, while credit-card interest rates have become increasingly immune to Fed rate cuts (with the average fixed-rate credit card now charging 13.5%), home-equity lines of credit, or HELOCs, have fallen below 4.0%. That's one of the lowest rates we've seen since these products first became popular back in the mid-1980s. And better yet, that rate is before you consider the tax break on your interest payments. Indeed, from a pure number-crunching perspective, consolidating high-interest, nondeductible debt into a HELOC or a home-equity loan, or HEL, is a no-brainer. Of course, your home is the collateral for such a loan, and foreclosure could leave you bunking down in Mom's den.
The Fed is on your side
Since the Fed rate affects how much consumers pay on credit card debt, home equity lines of credit and auto loans, consumers' monthly debt obligations should slide along with the rate cut. For home owners with home equity lines of credit, it shouldn't be long before they see lower monthly loan payments. "That rate will drop three-quarters of a percentage point fairly soon," said Holden Lewis of Bankrate.com. "Probably in about two billing cycles." The Fed's dramatic rate cut - its largest since 1984 - won't do much to help consumers with their credit card debt, however. According to Bill Hardekopf, chief executive of LowCards.com, credit card issuers may choose to lower their annual interest rates by three quarters of a point. However, for a balance of $5,000, that amounts to only $3.13 a month.
The No-Equity Loan Trap
THANKS TO SOARING home prices and the fantastic mortgage rates we've seen over the past few years, millions of homeowners have tapped their home's equity to pay off bills or fund a remodeling project. And in many cases, this can be a smart thing to do. But it's one thing to draw on the value of your home and another to exceed it. Falling prey to what's known as a "no-equity home-equity loan" not only could cost you a small fortune in interest rates and fees, but it could put your home at risk. A no-equity home loan is simply a confusing name for a high loan-to-value (LTV) home-equity loan, in which the amount you're borrowing surpasses your home's total value often by as much as 25%. This creates a sort of a hybrid secured/unsecured loan. Not surprisingly, these risky loans are aimed at the truly cash-strapped.
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