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.

Individuals who have taken out a home equity line can often find themselves in a financial bind.  Their variable rate can rise and cause their monthly payments to rise as well.  These rising payments and interest rates are causing for financial pain to many homeowners.  

Many homeowners have chosen to cut back and face the rising payments, but fear that the rising payments will only continue to grow.  Many decide that they will refinance their first mortgage and pull out enough money to pay off their home equity loan.  This is known as “cash-out” refinancing.  Many people use this method to pay off their variable rate credit lines.  Other homeowners are taking a chance and calling their lenders.  They are asking for something they never knew was possible-converting their variable rate to a fixed rate.  Lenders are not advertising this option but if you confront them with the idea, they are more than happy to help you out.  They are able to do this quickly with no appraisals, no credit checks, no title or closing costs and no fees.  

Some banks are also able to change your line of credit into a multiple tax-deductible financial planning choices.  You can take different lines of credit and convert them into fixed-rate or variable-rates.  Different loan amounts can be converted to fixed-rates for a specific period of time to help you pay for individual projects.  For example, you can take a $50,000 variable-rate credit line and convert $30,000 of it into a fixed-rate loan for five years to pay for education. 

J.P. Morgan Chase and Citibank home equity groups allow customers to divide their credit lines into several different groups with different terms, rates and at no additional costs. 

A new option in home equity is becoming available, largely with seniors, but not limited only to families who are free and clear of their mortgages: a reverse mortgage.

With the reverse mortgage, owners pull equity out of their homes without having a house payment, with loans that aren’t due until they sell the house or pass on.  Instead, their lenders are paying them.

The benefits follow: the money is tax free, as it is still considered a loan, there is more cash available for vacations or health needs, there aren’t restrictions on how the money is spent, and it can be received in payments or one lump sum.

The caveats are that they usually come with high interest rates and upfront fees.    The loan is still open to be charged mortgage insurance as well as loan origination fees and other closing costs.

The amount available depends on where the borrowers live and how much equity they have in their 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.

Are there ways to save your money when buying a new home?  Sure there are!  Financial planners will give you an abundance of advice using big terms on how to save your money.  I’d rather have the dish in plain language.  Pick and choose the ones that seem right for you.  Don’t feel you have to use them all, although if you can, great!

 
* Recycle the proceeds of your previous house sale into a down payment.  This will lower the amount of money you need to borrow.
* Ask about seller financing.  Somewhat risky, but if a sound contract is written, both parties benefit.
* Put down 20% of the sale price.  You’ll save yourself the mortgage insurance.  If you don’t have it upfront, make sure you notify your lender when you’ve paid in the 20% and that they’ve stopped charging you for it.
* Try to assume the existing house loan.  You’ll have a lower note than if you bought the house at market value.
* Pay points to lower your interest rate.  Sure it’s a chunk of change at the outset, but those lowered rates will save you thousands across the life of the loan.
* Play the “Who Wants to Hold My Loan?” game.  Lenders want your business.  Get them to compete a little for it.
* Good with your hands?  Buy a fixer-upper.  Nothing like a little sweat equity to make you smile.
* What’s one of the best deals around?  Foreclosures.  Banks are desperate to offload houses they’ve had to foreclose on.  These bargain beauties may need a little TLC, or not, but you’re guaranteed to get it for a deep discount price.

It is really worth setting up a budget that allows you to pay ahead on your mortgage.  If you can pay an extra $100 a month, you can save yourself tens of thousands of dollars on your total interest paid on your mortgage.  Even paying as little as $25 extra month can save you thousands of dollars.

This only works, however, if you don’t have a prepayment penalty in the terms of your mortgage.  You also get to use the interest paid on your mortgage as a tax deduction and reducing the amount of interest paid will reduce the amount of taxable interest.  Furthermore, you might have other places that would be better served with the money you could use to pay ahead on your mortgage (i.e. high interest credit cards or lucrative investment opportunities).

If you do decide to pay ahead on your mortgage, there are a few ways to do this.  You can make a double payment one month each year or add on money to your principle payment each month.  You might also want to look into a bi-weekly plan that will have you make two payments per month instead of one, but over the course of a year you’ll have made one extra monthly payment that will cut down on your mortgage over the years.

A reverse mortgage is a loan against your home equity that requires no repayment for as long as you live in your house.  The loan will be paid off when you cease to live in your home.  There are no monthly payments and you can choose to get the money in one lump sum or in monthly payments.  The money is also tax-free. 

 
A reverse mortgage requires no monthly payments and therefore you do not have to worry about not making payments or losing your home.  You can qualify for a reverse mortgage if you are 62 years of age or older.  The loan amount is determined by how much equity your home has built as well as what the current interest rates are, etc.  Your personal credit has nothing to do with whether or not you will qualify.  If you are still paying on your existing mortgage, the amount that is left will be used to pay off your mortgage. 

 
For example, say if you have you owe $100,000 on your existing mortgage and your house qualifies for $125,000 reverse mortgage and you plan on living in the house for at least another 5 years.  Your current mortgage would be paid off and you would have $25,000 to do whatever you want with.  You could put a down payment on a vacation home, take the vacation of your dreams or give the money to your grandchildren for college.  It is completely up to you what you choose to do with the money.  The loan is repaid when you cease to occupy your home. The amount owed can never be more than the value of your home. If your home is sold for less than the mortgage, the rest of the money goes to your estate.