A dangerous situation

Kate recently took out a HELOC, with no first mortgage, and now she wants to roll other debt into the loan. Dave explains why this is a bad idea, and gives her a better, safer solution.

QUESTION: Kate in Washington, D.C., is single and makes $45,000 a year. She has only two more debts left to pay off — a recent $100,000 HELOC with no first mortgage, and $24,000 in student loan debt. Now, Kate has the opportunity to roll up both of her debts into one. She asks for Dave’s approval on the idea, but he sees some potential issues that could make this a bad plan.

ANSWER: Wow, that’s a dangerous situation. The reason the home equity loan is dangerous is they generally have call provisions on them. Within a one- or three-year cycle they can call the entire loan on you. If they decide they don’t like it anymore, that could put you in a position where you have to scramble to get a loan to keep from being foreclosed on.

Swing down to that same bank and see if you can switch to a fixed-rate, fully amortizing loan — meaning regular payments, no balloons and no closing costs — and convert that thing out of a home equity loan position. That is not a good loan to have that big, especially with a $45,000 income.

So, would I add $24,000 to that? Absolutely not! Home equity loans are typically going to have higher interest rates than student loans. And if you become permanently disabled or die, your student loans can be forgiven. Regardless, I’m not going to tell you to put your student loan on your home, unless it’s to avoid a bankruptcy or foreclosure. I want you to plow through that thing, and get it all paid off completely in the next year and a half.