It is true that plugging into the equity in your home through refinancing your mortgage will wipe out credit card and student loan debt; but, it can create new problems if you keep on spending.  Before taking out an equity loan it is a good idea to take a long, hard look at why you are doing so.  If you are  trying to keep the creditors from breathing at the door or calling on the phone a home equity loan may not be the best solution.  If you are taking the equity loan out to pay credit card debt and other consumer debts, ask yourself “Are you comfortable converting short-term unsecured debt into long-term secured debt?”  You could be risking your home and not really coming to terms with the spending issues that put you in this situation — and that, at least in my eyes, could be a very bad thing. 

Weighing your debt basically consists of figuring out what the average rate is you are paying.  This works great if you have a primary mortgage plus a HELOC (Home Equity Line of Credit) or a secondary mortgage. 

The first step is to add up your debt.  For example, you have a $200,000 primary mortgage at 5.875% and a HELOC with a balance of $100,000 with a rate of 7.25%.  Your total debt is $300,000.

The next step is to divide your primary mortgage of $200,000 by your total debt of $300,000.  This will produce .67, which you will then multiply by your primary mortgage rate of 5.875% which equals 3.94%.

The third step is to do the same process with your HELOC.  Divide $100,000 by $300,000 which will produce .33.  Multiply .33 by 7.25 and you get 2.39%.

Now, you will add  2.39 plus 3.94 and you get 6.33.  So, you are paying an average of 6.33% on both mortgages.

Almost anywhere you look you’ll see them — ads for debt consolidation.  It almost sounds to good to be true, so is it really the best move to consolidate your debt?

Here are some reasons why you might want to consolidate your debts: 

1. You’ll have just one payment to make which makes managing your money MUCH easier.

2. Generally a debt consolidation loan utilizes your home equity, so you’ll have a much lower interest rate than you’d ever get on a credit card.

3. Debt consolidation loan payments are often lower than the total of what you’d be paying if you were paying each loan or credit card balance individually.

There are some negatives you should consider before jumping into a debt consolidation loan, however.  First of all, you need to make a commitment to stop using your credit cards so that you don’t end up in the same place all over again.  Second of all, if you choose to consolidate fixed-term loans, such as car payments, you’ll likely end up extending the length of the payments.  Lastly, you need to be absolutely sure you can afford the new payment every month because it is tied to your house.  If it ever happens that you cannot make your payments, you could lose your house.

There are a few scams used by unethical lenders that one should watch out for.  These abusive lenders may target the elderly, minorities, low-income or bad credit individuals who own a home.  This home is the only asset these people have and the lender is basically out to get it. 
The first scam is called equity stripping and it applies to these people.  They find people who need money but have a low monthly income.  Knowing that they cannot make the monthly payments, they tell them to “pad” their income on the loan application.  They then put them in a loan that the people will not be able to pay back.  Suddenly, these people are behind on payments and will eventually lose their house.  These people are just trying to make a living and then abusive lenders come by and basically steal from people who are already barely making a living. 
The second scam is loan flipping.  This can happen to anybody.  You are contacted by a lender who tells you to either consolidate your debt or make your home’s equity “work” for you.  You may have had your mortgage for years.  The will tell you about a loan with a low interest rate and then refinance your home’s mortgage or an equity loan.  You are able to make your monthly payments and you get some extra money.  Then they call you back and offer you a loan that they can refinance with your current loan.  What they don’t tell you is that there is fees and penalties for refinancing the first loan again.  Eventually, you end up with a string of debt that has grown over the years and you can’t get out. 
Both of these scams are commonly used.  You should first be aware that the lender’s who call you on your home phone during the day do not really know anything about you.  They tell you to come and consolidate your debt or get a home equity loan.  What they are really doing is trying to bait you into a loan that will only hurt your credit.  Financial responsibility and common sense must be used in these situations.  If you are already in financial problems another loan is only going to sink you more.  Be smart and tell the phone lenders to take you off their call list and only take loans out on large purchases that you know you can pay back. That is the best way to avoid such situations.