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Can Your House Lend a Hand? Here's What You Need to Consider

Using equity and money from home to consolidate credit card debt.Q: I’m a stay at home mom and my husband’s been on short term disability for almost a year, recovering from an injury. We managed okay for a while but now I’m looking for work. However, my husband isn’t well enough yet to look after the kids and daycare would be very expensive. We were turned down for a consolidation loan at our bank, even though we own our home. Then I see ads that say if we own our home, we can get a loan to pay off our debts. How can that be?

A: There are quite a number of companies advertising their lending services, trying to entice you to use your home as an ATM. While it may sound easy to let your house lend a hand, consider who will lend you a hand to make the payments each month.

Consider the cost of fees and high interest rates

The application process to borrow money against your home through private home equity lending companies is similar to what you may experience with any other lender. However, depending on how much equity you have in your property, how much you want to borrow, and your ability to pay it back, the interest rate can be as much as 20 percent per year. On top of paying thousands of dollars in interest, you are also paying fees to the lender to process and arrange your loan. In many cases, you pay the fees with the money you borrow.

Questions to ask yourself

Before you sign for a very expensive loan, we would encourage you to take a careful look at your circumstances. Consider:

  • How much longer your husband will be off work and when his health will improve.
  • When you will be able to go to work, either with an outside daycare arrangement or when your husband can look after the kids.
  • If your creditors can help you directly, without borrowing any money.
  • If you can generate enough income renting out a part of your house.
  • What other options you have: reducing other expenses, cashing out investments, asking family for help, selling your home or maybe renting it out to earn more than what you’d pay for rent elsewhere.

What happens if things don't work out?

If you borrow against your home, you face the very real possibility of owing more than what you could sell home your home for when property values readjust; or worse, that your lender may become your landlord if you can’t make your payments.

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One of these radio ads has the tagline "Making your home equity lend a hand." I think a far more realistic line is "Making your home equity disappear."