HELOC debt is 2x my mortgage, help

Question

My home equity line of credit (HELOC) amount owed has now grown to where it is approximately double the amount remaining on my mortgage and the interest payments are killing me. I have no other debt. The total amount owed, remaining mortgage plus HELOC, is far less (probably about 50%) than what the house is worth.

Using any basic mortgage calculator, if I add the amounts together as the new 'mortgage', the monthly payments are only slightly more than what I am currently paying for my mortgage alone.

Our family income is quite substantial, and I am not worried about losing the house. However, it seems that I'm spinning my wheels by paying off the mortgage, and (barely) chipping away at the HELOC.

What would be the best way to consolidate these two debts?

Answer 1

The first step is to stop adding to the problem. Get on a written budget, cut expenses to the bone, have a modest emergency fund (1-2 thousand) just to help you get through true emergencies without borrowing money, and get as much of it paid off as you can.

You might be able to consolidate the debt into, say, a new mortgage, but you need to be careful to look at what that costs you. Closing costs can add half of a percentage point to the overall cost of the loan, so if you can get a plan to pay off the other debt in 3-5 years (a typical break-even point of a refinance), consolidating may not be worth the cost unless your current debt is at a significantly higher interest rate, and you can reduce the interest you pay. The danger is that consolidating often extends the term of the loan, reducing the immediate pain but extending it out for a much longer period. It can also make you feel like you've accomplished something, and enables you to KEEP spending, potentially leaving you with MORE debt than you started with.

Another problem with consolidating (as suggested in the comments) is that if the line of credit is unsecured (not a HELOC or backed by other collateral), you would be moving unsecured debt to a mortgage, so if you default on the consolidated loan, you'll lose MORE than you would if you default on the unsecured debt (since the bank can take the balance out of a home foreclosure).

So until you fix the problem, consolidating may actually make your problem worse.

One thing that helped me when I was in debt is when I think about buying something, I think that every dollar I spend at this point is borrowed money. Think about how long it will take you to pay off the debts, and how much interest the purchase will cost you. It might make that vacation or new HDTV look less appealing.

Answer 2

Loans have a tendency to do that, kill you with the interest. Heck even if a person can afford the payments that is what is happening although it is well hidden. I mean after all, all the financial media, all television recommends a high credit score so you can borrow and buy from them today. Okay off soap box.

If your house is worth more than the two combined loans, you are probably best off getting a new mortgage and putting both loans under one payment. It may be inefficient interest wise, and it will be very inefficient if PMI is required, but at least the balances will not be growing.

Or, you can drastically cut your life style, get on a written budget, work more (second job or overtime) and pay down this loan so it is out of your life. This may be the only choice if the combined loans are greater than the worth of the house. BTW, this is what I would recommend.

Interest payments hinder a person's ability to build wealth. With the kind of loan you are talking about, it can destroy many years of hard work. It needs to go away. Treat this as an emergency. However, you can do this.

Answer 3

My HELOC has now grown to approximately double my mortgage

So, how did it get there?
If it was a one-time thing like you had major medical bills from an emergency, did a major renovation on the house, or maybe had to pay to ransom a loved one... go ahead and refinance this week. (Assuming you don't foresee it will happen again)
If you aren't sure how you got to this point, and you don't change something, refinancing is a poor choice because you'll be worse off in two years (worse off because you are out-spending that "substantial" income).

Now, to answer the question you asked:

You asked: What would be the best way to consolidate these two debts?
But, I think the question you want answered is: "How do I minimize the interest I'm paying?"

Consolidation may not be the best move, because interest rates have gone up. If you've had your original loan a while (and I hope so) it may be lower than the current rates.
A quick trip to BankRate shows current refinance rates are about 4.6% for both 20 and 30 year fixed rate mortgages (assuming a 715 credit score and 50% equity).

Home equity loan rates are about 9.5% - and I'd advise a loan not a line of credit (LOC) because you've already rung up double your balance with a LOC - since you have a good income, have the discipline to just live off it.

If you do refinance be sure that you continue to pay what you're currently paying with the higher interest rate instead of the minimum payments - you'll pay it off much faster.

You didn't give us any actual amounts nor did you provide either of the interest rates, so that's as far as I can go with it.

WARNING:
A reason that your payments would be only slightly higher with both amounts as your current payment is that the life of the loan is longer.
Use the same mortgage calc to add up the total interest paid if you continue your current loan vs. the total interest paid plus refinance charges ($500 for appraisal + lender fees + etc.) to get the new loan.
Compare those amounts and I expect you'll see something different than what the monthly payment amount is telling you.

Answer 4

Your Debt is not something you “work on” - It is a HUGE, FLAMING EMERGENCY!!!

The core of the problem is that you are spending more than is sustainable. While re-mortgaging might seem to help, unless you drastically change your lifestyle, it will only make things worse in the long run. Getting a second job can help, but only if you also change your lifestyle. Otherwise with more income. you'll just spend more and will be in an even worse situation.

You need to get out of consumerist mentality and decrease your spending a lot. Here are some of the things you need to do:

• Make a detailed list of all your expenses. Collect all receipts for cash purchases and make a budget. Until you do, you'll have no idea where you really stand.
• Stop eating out and having fast food
• No Starbucks or evening pub visits
• Cancel your cable TV
• Sell your car and use public transport. Even better, use a bicycle. You car costs you far more than you think. This is the biggest thing you can do to get out of debt. If you make money by driving your car, sell your fuel-guzzler and get a cheaper used car that has low fuel usage and low registration expenses.
• Forget about vacations until all debt is completely solved and you have money put aside for it
• Drastically reduce you cell phone plans
• No purchase of non essential items
• Make a shopping list of food that provides proper nutrition. If possible, go to shops only on dedicated days.
• Pay credit card bills as soon as you receive your paycheck. Don't use them unless you have unexpected needs that must cannot be ignored (health, home and car repairs, etc.)
• Make sure to put extra money in your savings account

There may be other things as well that you can make more efficient and get you living on a level that you can actually afford.

Here is example how you should address it.