Home Equity Loan To Pay Off Debt?

One of the most common questions I am asked is:

"Should I get a home equity loan to pay off all of my non-house debt?"

Here is my response.

I am not a big fan of consolidating one's non-house debt into a home equity loan.  This is for several reasons, and I have outlined those reasons below.

  • This is addressing a symptom, not the root cause.  This question is usually motivated by our need for immediate action.  It is the same motivation that causes us to purchase a car and finance it for five years.
  • Borrowing from home equity makes it more difficult to sell the house.   This is especially true in today's house market.  There are a ton of people who now owe more on their house than it can be sold for.  Consequently, they become trapped in the house.
  • Changing spending behavior is a process.  If one runs out and consolidates their debts, it might remove the urgency from the need to change spending behavior.  Changing one's spending behavior takes time.  I am convinced that if I had obtained a home equity debt consolidation loan in December 2002, I would not have changed my spending behavior.  However, because it took fourteen months to address our debt, our spending behavior was completely changed.  We have never looked back!

Having spoken with thousands of people and working one-on-one with nearly one thousand people in the past two years, I am convinced that obtaining a home equity loan is not the best way to eliminate debt.  The most common result from obtaining a home equity loan is less equity in the house and the consumer debt shows back up because the spending behavior was not changed.

This is, in fact, my own story.  I obtained a debt consolidation loan to move a pile of credit card and consumer debt to one payment.  After paying $315.60 a month for an eternity, I wanted to celebrate, but I could not.  Why?  Because while I had finally paid off the debt consolidation loan, I had not changed my spending behavior and my credit card debt had grown back to more than I had consolidated in the first place!

What do you think?

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  1. Saving Freak on November 14, 2008 at 4:49 am

    Ignoring behavioral patterns for the time being, another great reason is that you are now taking unsecured debt and making it secured debt. So if you consolidate, then the worst happens (loss of a job or injury), and you cannot pay the bill they take your home. With unsecured debt they call and complain and threaten but there is really nothing they can do about you not being able to pay. Sure they can sue you but if you have no money they will not get anything out of that route either. Overall keeping debt unsecured is the safest thing you can do when you have too much debt.

  2. Daniel on November 14, 2008 at 10:52 am

    The saving freak and Joe are wise beyond their years! I considered a home equity loan when my wife and I started our journey last fall…long story short, we decided against the HEL and snowballed the debt we had. What was a debt freedom date of 41 months last October is now at 14.2 months! Our BHAG is july 2009 to be debt free except for the house! Keep doing what you do! This is life altering, awesome stuff!!

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