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Thursday, April 17, 2014   
 

Equity Issues
by Scott Bilker
Scott Bilker is the author of the best-selling books, Talk Your Way Out of Credit Card Debt, Credit Card and Debt Management, and How to be more Credit Card and Debt Smart. He's also the founder of DebtSmart.com. More about and DebtSmart can be found in the online media kit.
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Scott Bilker

Scott,

We have been upgrading our fixer upper and are interested in continuing the process. Problem is, our 2nd mortgage is an LOC and the APR is drowning us! We want to pay off the LOC and our credit card debt and have some cash to invest in renovations.

We are a single income family, and as far as debt-to-income ratio is concerned, we're not looking so good. We are hopeful our "sweat equity" will be sufficient to borrow against. I am not so keen on this approach, but my husband is in the building trade and feels our only way is up as far as property value is concerned. What to do?

Alison

Alison,

Thanks for writing!

First off, I believe it is wise to upgrade your home. It's a good investment, certainly at this time, as well as fulfilling!

I am surprised that your LOC (home equity line of credit) interest rate is so high that you would say it's drowning you. There are benefits with home equity loans, well, at least one, which is the tax write off. Another should be a lower interest rate when compared to other loan options. But I'm not getting that vibe in your case.

My understanding of your question is that you want to fix up your house, borrow money against its new value, and then pay off the LOC and credit cards. Assuming that this is the case, it's not the debt that is the trouble, but the cost of this debt. You're trying to reduce this cost by reorganizing the debt. That's a good strategy!

Of course, you may have trouble getting a 3rd mortgage simply because it's in the 3rd position. You would want to refinance all your debts into one new, 30-year mortgage at a low rate. I suggest a 30-year because your payments will be as low as possible.

This is a good plan, but one that may take a while. In the interim, I would look at refinancing some of these debts at lower rates. You should include new credit options in this search. I have a quite a few low rate credit cards listed here.

DO IMMEDIATELY: Contact your credit card banks and attempt to negotiate lower rates. Tell them that you're going to be renovating your house and, therefore, making large purchases. Tell them that if they want you to use their credit card for these purchases, they must reduce your current rates and your purchase rate or you will use another credit card.

Please let me know how it goes.

Best,
Scott

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