'Slash Your Debt' With Home Equity Consolidation

This year, the official household savings rate fell to the lowest level since the Great Depression. But with households gaining so much real estate equity, you can manage that debt, according to a team of money-saving experts who've pooled their expertise to extol the virtues of transforming many debts into one.

Debt consolidation comes with the possibility of a single payment, and a low interest rate that allows you to pay off your indebtedness in less time for less money -- provided you practice sound financial behavior. To help to that end a timely tome "Slash Your Debt: Save Money and Secure Your Future," (Financial Literary Center, $8.95) devotes a full chapter to tapping your equity as a cure for indebtedness.

Provided you've got the equity, you have two options.

Home equity loans

More than one third of all home equity loans are used for debt consolidation, according to Marc Eisenson, one of the book's author and a partner with the home-based consumer advocacy firm Good Advice Press in Elizaville, NY.

To make home equity loans work as a debt consolidation tool, Eisenson and co-author and partner Nancy Castleman advise:

• Change your spending habits. Before you apply for the loan, practice living on a lower income. Save the difference. Don't take on additional debts while the equity loan is outstanding.

• Choose a short payment period. Even with a low interest rate a 10 to 15 year home equity loan can be expensive. Prepay your loan in three to five years. The savings can be startling. If you transfer a $15,000 balance of just one 17 percent credit card to a 9 percent home equity loan and pay it off in five years, you'll save more than $30,000.

• Avoid loans for more than the value of your home. Not only can't you deduct all the interest but you'll also put your home at unnecessary risk for a costly loan.

• Shop around for the lowest rate. HSH Associatiates provides insightful informative to that end.

• Beware. Avoid high closing costs, low introductory or "teaser" rates and credit cards tied to home equity lines of credit. They all undercut your reason for consolidating -- to save money.

If your mortgage is a small portion of your home's value or if you are paying an interest rate higher than prevailing rates, you could be a candidate for tapping equity through a refinanced first mortgage, says the book's third author Gerri Detweiler, an advisor with the Debt Counselors of America.

With a refinanced mortgage, for the same mortgage payment or less than you've been making each month, you can pay off more expensive debts. If you take out the loan for 30 years, however, you'll borrow against more of your home equity for a longer period. That could be both expensive and risky, by putting your home in jeopardy for a longer period than the previous mortgage.

• Don't pay for more of a refinance than you can afford. Don't let a lender talk you into a 15-year refinance if you can't make the payments.

  "There's no point in starting a debt consolidation program, unless the goals you set are ones you can live and stick with," Detweiler said.

• Keep making the same monthly payments. If you've managed to make all the payments before consolidation, adding that money to your monthly refinanced mortgage can save you thousands.

• Negotiate. Points and fees are negotiable, especially if lenders are hungry for customers. Check rates, points and fees with at least three to five lenders before signing on the dotted line.

• Pay closing costs up front. If you have the cash, paying closing costs will save you on financed interest charges over the life of the loan.