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Home Equity Debt: How to Deal with Your Debt

By sbup Staff

Too much debt and not enough saving helped put us in the current recession. If you are struggling to make ends meet, now is the ideal time to change the way you run your finances so debts do not pile up.

The first step is to sort out your spending.

"Prioritize what you can't live without, like your housing costs, utilities and your insurance costs," says Clare Stenstrom, a certified financial planner and partner with New York-based Bourne Stenstrom Lent Asset Management. "Then make a list of what makes your life a little bit more comfortable, along with a list of frivolous expenses."

Cutting out the frivolous expenses—and possibly some of the comfort-giving ones—can help create some breathing room in your budget. You can use that saved money to build an emergency fund and to pay down some of your high-interest debts.

The worst thing you can do with a heavy debt load, according to Stenstrom, is to jeopardize your home by making it the collateral on your debts. It may seem appealing to consolidate credit card debt on a home equity loan, given that equity loans’ interest rates are relatively low in many parts of the nation. For example, residents of Arkansas, may qualify for a 5.49% home equity loan from US Bank (USB) or a 5.75% loan from Simmons First National Bank (SFNC). That’s far lower than most credit card rates, which typically are well into the double digits—such as the 11.99% rate offered to some Blue Sky American Express (AXP) cardholders—because a home is acting as collateral.

Nevertheless, Stenstrom advises not to use the low rates on home equity loans to pay off your credit cards. "You're much better off calling your credit card company and negotiating a lower rate," says Stenstrom. "Be patient and polite, and have a plan written down in front detailing your current rate and the rate you can afford to pay."

Moving forward, Stenstrom suggests a return to the old-fashioned approach of saving up to buy something. "When my parents bought a car, they never took out a loan," says Stenstrom. "Right after buying the car they started saving for their next one."

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