What should I do????? Credit question?

Question

I am a solvent, stable, well-employed, credit-worthy individual. I bought a house 7 years ago which has more than doubled in value due to the market I'm in and of course, location-location-location. I have about $10k of debt (credit cards, automobile). To further increase the value of my home, I want to renovate my kitchen and bathrooms to the tune of about $16,000. Here's my big question: I've applied and been approved for a $30k home equity loan to finance the renovations and pay off the auto and credit card debt. Am I turning down the wrong road? Am I asking for trouble? I really, really hate debt. My home mortgage is [was] low and now I'm adding back another $30k.

I opted for the home equity loan vs. line of credit so that I got a fixed interested rate, which was important to me. I will pay off the home equity loan long before the term is up.

The return on the improvements will definitely more than double my investment in upgrading. Is this the right thing to do?

Answer 1

If you consolidate your higher rate credit card and auto debt into a lower fixed rate home equity loan, then that is a good idea. But only if you still have a good amount of equity in your home after the additional debt (not just based off the new increased market value). Just be careful you are not borrowing too much against the value of your home since the real estate market seems to be cooling. I hope your mortgage is a fixed rate also. Lastly, since you say you don't like debt, I hope you cut up those credit cards after you pay them off with your home equity loan and don't accrue any other debt.

Answer 2

It sounds like you have a pretty good head on your shoulders. A couple of suggestions:

I agree with the person that said you need to check the interest rate on the home equity load against the credit card interest rate. In almost all cases, the home equity loan rate will be lower, but it never hurts to be too careful.

Now, the improvements you plan to do are another story. If you are planning to sell the property in the very short term, then it may make sense to do these renovations. However, if you plan to live in the home for 3 or more years, you may want to consider delaying these improvements. It doesn't make a whole lot of sense to increase the value of the home for no reason. If you can live with the kitchen and bathroom in its current condition, financially it makes more sense to delay the improvements.

When you think you want to sell the property, that is the time to make the improvements. That way, you can invest the money you would have spent on improvements between now and the time you want to sell, and turn a little profit. Additionally, the improvements will be brand new when a prospective buyer inspects the home, which will make a much better impression.

All that being said, this advice is strictly financial. If YOU would like to make the improvements for YOUR OWN enjoyment of your home, by all means do it!

Answer 3

If the interest rate on your new home equity loan is lower than the interest rates on your car loan and your credit cards, then you have made a sound financial decision in consolidating that debt.

HOWEVER - for many people, this can be a slippery slope, and if you are not very careful, it CAN turn you down the wrong road.

Once that debt is all nicely consolidated, it suddenly becomes very easy for you to start accumulating more debt, most likely in the form of credit cards not paid off in full every month. If you're not careful and vigilant, you could easily find yourself in the same position (owing $10k) in just a few years.

Credit card debt is quite possibly the single most damaging item in anyone's personal finances. It's considered unsecured debt (meaning there's no collateral behind it), AND the interest rates are usually high.

By all means take out this loan and do the projects you need to do to your house. But then resolve to change your credit habits so that you ALWAYS pay your bill in full, every month.

Good luck!

Answer 4

Personally, I really, really, really hate debt. So I wouldn't go into more debt to improve my kitchens and bathrooms. My advice is to not take out a home equity loan or HELOC.

With a good emergency fund in place, I would start doubling or tripling what I am paying on the credit card and car. You sound like you are in a good enough financial situation where you could afford that. If you are determined, you could pay off the $10k in less than a year by paying around $1000 per month. After paying off the debt, take that same $1000 per month and put it in savings. You could pay off your debt and pay cash for your renovations in approximately 26 months. On top of that, you could save up $8000 and renovate your kitchen 18 months from now. Save up the other $8000 and then renovate your bathrooms (or vice-versa). If you can pay and save more than $1000/month, then your time frames drop in accordance.

My opinion is that going into more debt at any point is dangerous because life happens. Since most of us will have a negative financial experience in any given 10 year period of time, more debt hanging over our heads during those times does not help matters. On top of that, your home equity is the collateral for the home equity loan. The time at which you are having major financial issues is not the time to be worrying about a creditor taking your house from you.

I avoid the debt and save up for the improvements.

Answer 5

You should definitely do that IF you are disciplined enough NOT to use the credit cards to get the charged back up again AND if I were you I would make the extra (car payment and charge card amount you would be paying if you didn't pay them off) payments on your mortgage each month. That is AFTER you have your "emergency fund" (3 to 6 months worth of expenses in savings in case you are ever off of work for an extended period of time.. have the money saved to allow you time to float and get back on your feet... new job, healed from an injury whatever bump in the road that may come your way).

I think with interest rates where they are at this will be a great investment for you... Go for it!!!

Answer 6

Very smart move.

You are using your house as your bank, and you have already discovered that loans tied to real estate typically have lower interest rates, and quite often, will result in a gain in net worth over the long run.

I applaud your move, and would have recommended using an equity loan instead of financing your car when you made that purchase.

Best of luck.

Answer 7

I think that it is good to do as long as the APR is lower than your credit cards and car loans. If it is higher then you would be hurting yourself. Definately go with the loan and not the line of credit. The second one will get you in trouble with the variable APR.

Also, this loan will not be a revolving one like your credit cards so your credit score will go up and you can use the loan at tax time to get money back.

Answer 8

I would definitley do the renovations and pay off the auto and cc debt... that will give your credit a boost in itself and the value of the house will skyrocket Go For It

Answer 9

Smart thinking.
Kitchen and bath renovation/updating returns more than the investment.
You can rest assured that your lender knows this.

Answer 10

Good morning there, I think you must see NHBS, Inc resource to address your concern..have a great day