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Three Reasons Why You Shouldn't Use Your Home's Equity To Pay Debts

Posted By admin || 4-Feb-2010

Home Equity Loan

Never Use Your Home's Equity To Pay Debts

As more Americans fall behind on their debt payments because of a job loss or reduced income, many are turning to the equity in their homes to their debts hoping that they can avoid bankruptcy.  But cashing out the equity in your home to repay debt may be a huge mistake here's why:

  1. When you cash out equity in your home to pay debt, you put your home at risk for foreclosure .  If you can't repay that equity loan, the lender could foreclose.  And even if you were able to make payments on the loan, you may not be able to cover the cost of the mortgage (plus the equity loan) when you want to sell the house.  One common problem many homeowners are facing is the inability to sell their home and cover the cost of their mortgage. This is one of the leading reasons some homeowners file bankruptcy.
  2. While most unsecured debts can be discharged in bankruptcy, you cannot discharge your mortgage AND keep your home in bankruptcy.   In other words, you must pay your mortgage if you want to keep your home using bankruptcy. When you take out an equity loan, you increase the costs attached to your home and reduce the chances that you can afford to repay the mortgage even if you filed bankruptcy.   If you feel the need to take out an equity loan to pay your debts, then you probably need to consider filing bankruptcy instead.
  3. While taking out an equity loan may appear to solve your debt problems it is only a temporary solution and may only be delaying bankruptcy.  Eventually you will exhaust the equity loan and your debts will still need to be paid.  If you are currently unemployed or living on a reduced or fixed income, resolving that situation may take longer than you expect.  Currently the average unemployed American is remaining jobless for over 8 months.

Remember, taking out an equity loan is usually a sign that you exhausted all of your non-bankruptcy for repaying your debt.  Before you make your situation worse by taking out an equity loan, please consider how bankruptcy may help you discharge you debts and save your home.

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