Learn about the pros and cons of a home-equity loan
Getting a home-equity loan to pay off highrate credit-card debt can sometimes be a good idea, but it also has some risks.
Q. My sister has about $100,000 equity in her house and wants to take out a $40,000 home-equity loan at today’s low mortgage rates so she can pay off her high-interest credit-card debt and an unsecured personal loan that she took out last year. This seems to make sense to me, but what do you think about her plan?
A. Her plan certainly has some merit, but it is not as cut-and-dried as she might think.
Frankly, I am weary of the recent advertisements that suggest that all homeowners with lots of equity in their home should remortgage their house or condo — either by taking a “cash-out” refinancing mortgage or a homeequity loan — at today’s low rates, then use the money they receive to pay off their higher-rate credit cards or to go on a spending spree.
On its face, it seems like your sister’s idea is a “can’t lose” strategy: Why pay interest on bank cards that charge 18 percent interest or more each year when you can instead pay them off with a new 3 percent loan against your real estate property?
There are several reasons, though, why following this strategy is not best for all homeowners. For starters, credit-card balances are considered “unsecured” debt. If you charge a bunch of money but do not pay it back, the company can sue to get repaid or can repossess the largescreen television or other items that you bought with the card. The card company, however, cannot force you to sell your home.
Conversely, if you instead refinanced your mortgage and took out some cash (or used your new home-equity loan) to buy that same TV, the lender would then have the legal right to file a lien against your home and even foreclose if an unexpected financial crisis left you unable to pay back the money.
Filing for bankruptcy would be an option but might not be enough to help keep your house, because the borrowed money was secured by the home and the land underneath it.
There would be no sense in purchasing a bigscreen TV or other personal items if there would soon no longer be a home in which to put them.
Your sister should carefully consider such issues before remortgaging her home. Consulting with a licensed investment professional or other pro would help.
REAL ESTATE TRIVIA
The Federal Trade Commission offers an outstanding free online booklet about home-equity loans and lines of credit at www.consumer.ftc.gov/articles/0227.
Q. My wife and I owned our house for 27 years, but she passed away in June. Now I am thinking of buying a condominium because a homeowners association would take care of mowing the lawn and doing other jobs that I’m too old to do. However, my friend says that I wouldn’t get any tax write-offs for mortgage-interest payments if I bought a condo instead of a single-family house. Is that true?
A. I am sorry for the loss of your wife. But with all due respect, it sounds as if the friend who is providing you with tax advice is misinformed.
You can buy a condo or house and deduct all of your mortgage-interest payments on up to $750,000 in debt. A loan that size would allow you to buy a nice condo in most parts of the United States.
Perhaps the confusion lies in the monthly dues that you would have to pay to the condo homeowners association itself. Owners cannot deduct their HOA dues if they live in the condo all the time, the Internal Revenue Service states, but may deduct some or all of the dues if the condo is rented to someone else on a part-time or full-time basis.
Q. A home we like was listed for $287,000, and we made a full-price offer. The sellers then made a counteroffer for $296,000. Aren’t the sellers legally obligated to sell the house to us because our initial offer matched their original $287,000 asking price, or do they have the right to try to squeeze us now for an extra $9,000?
A. I get this type of question every time that the housing market is hot — as it is now — and many homes start drawing multiple offers from buyers.
Sorry, but the sellers are not legally obligated to sell their home to you, even though you offered to pay their original asking price. They did not sign a contract accepting your offer, so they are free to look for a buyer who is willing to pay even more.
If the sellers cannot find such a buyer, then decide to accept your original $287,000 bid, you will not have any legal obligation to go through with the deal, either. That is because your first offer was rendered null and void the moment they made a counteroffer for $9,000 more.
Send questions to David Myers, P.O. Box 4405, Culver City, CA 90231-2960, and we’ll try to respond in a future column.