Debt Free

You may have what amounts to your own private bank. At least that seems to be the prevailing opinion among many Americans. Low interest rates, coupled with the surge in real estate values around the country, have been fueling a boom in refinances and home equity lines of credit. At the end of 2004, over $719 billion was outstanding on HELOCs and home equity loans. This spectacularly large figure represents almost triple what the country's borrowers owed five years previously.

If you want to join the masses, by all means, go right ahead, but don't just jump blindly into the pool with all the other fish. Look carefully before taking the leap. In many instances it makes financial sense to tap into the equity in your home, but remember, you'll be risking what is most likely your largest asset in the process. You don't want to lose it. Many have used this newfound source of cash for such purchases as cars and vacations. Don't be so stupid. If you do use money for which your home is collateral to take that trip to Fiji you've always wanted, you probably deserve whatever happens to you.

You could use it to retire debt that you're paying a higher interest rate on. Since HELOCs and home equity loans are secured by real estate, a fairly stable asset, the rates are very low compared to other forms of consumer credit. If you choose this path to debt rearrangement, make sure your home is protected first. If you have excessive credit card or other high interest consumer debt due to excessive spending, it is essential you change your spending habits before risking your home. To do otherwise is inviting disaster.

One popular use for your newfound cash is to start your very own real estate empire. While still risky, this is a far better choice. Let's repeat that. It is still risky. Leverage is a well known path to creating wealth. You can leverage the equity in your home that would otherwise go unused to create real estate wealth. In some real estate markets, you can do very well. Do your research first. You'd do well to first determine if being a landlord is something you really want. You may have to deal with difficult tenants or jump in your truck for a drive across town to take care of a problem at 2:00AM. Still, more millionaires have been created through real estate than with any other method. If you are going to have debt, this is one of the few good reasons for it.

If you choose a HELOC, you'll be more susceptible to interest rate fluctuations. A home equity loan will allow you to lock in a low interest rate in times of increasing rates (like now). A HELOC will give you more flexibility. You only need to use what you actually need. If your credit score is over 700, you should be able to get an interest rate on a HELOC at prime or better. Unless you are the sub-prime borrower category, you shouldn't have to pay loan or appraisal fees. Check carefully to see you don't. You may have to pay an annual fee, however.

Where can you start? First, you must collect all the necessary information. Pull a copy of your credit report. You get one free each year from each of the three major credit reporting agencies. Call 1-877-322-8228 for your report. That is a central request number for all three agencies. See if there are any inaccuracies on the report. One 2004 study found that over 25% of all credit reports contained errors. These credit report errors can be things like false accounts or delinquencies (25%), listing the same debt multiple times (22%), or paid off (closed) accounts that are still listed as open on the credit report (30%). Your credit may not be as bad as you think. Some of your negative credit history may be due to these errors. If you find any inaccuracies, correct them. This may take some time, but will be worth it. You'll improve your credit score and get a better rate on your refinance or HELOC. It will take from 30 – 60 days after any inaccuracies have been corrected for the results to be reflected on the credit report.

So, you want to refinance, but your credit is less than perfect? Don't worry, all isn't lost. You have some options. You can still refinance to take advantage of the equity in your home for extra cash. You can consolidate debt, pay for home remodeling or just about anything else with the extra cash. It could be used to get you on the path to financial independence. Remember, if you've got bad credit now, you can reclaim a good credit rating with just a little patience and prudence. Remember, if you're trying to be financially secure, whatever you do, don't use the cash from the refinance for frivolous purposes such as a vacation or a ski boat. You can leverage the equity in your home to achieve financial freedom through a cash out refinance, if you've got good or not so good credit. Just be extra careful, it's your your home you're risking.