Your home, your ATM

Point 2: Although $35,000 sounds like a lot of money, "If you're not planning to move anytime soon, you have a chance to rebuild that equity," says Mary Claire Allvine, a financial planner and principal with Brownson, Rehmus & Foxworth, a financial services firm based in Chicago and Atlanta.

Beth and her husband felt the loan was manageable, given that they aren't planning to move -- and the equity in their home is probably stable. "The market in the Pacific Northwest would have to take a nosedive for us to lose out," Beth thinks.

Point 3: This was the one consideration that gave Beth pause. "I know there's a danger of going back to old habits, and building debt back up -- but since the bulk of the loan was going toward student loans, we thought this was the best way to go."

Also, after six months of unemployment when she was laid off in 2005, followed by one year of massage therapy school, Beth once again has a job (working at a local spa), and she's looking forward to that dual-income cushion.

Doing the math

In addition to the above calculations, Beth and her husband also took into consideration the interest rate they were paying on their credit card and her private student loans -- both 8%. Even though the home-equity loan was slightly higher at 8.6%, the monthly payments ended up being about the same, she says.

"I know there are some people who would scream because the home-equity loan has a higher interest rate," Beth says, "but we figured the saving in taxes from being able to deduct the interest -- which you can't do with credit cards -- would offset the difference." And it does, as the table below shows:

Beth's debt consolidation

	Before	After
Household income	$ 43,548	$ 69,339
Student debt	$ 18,000	$ -
Credit card debt	$ 11,000	$ -
Mortgage debt	$ 78,000	$ 113,000
Cash out		$ 6,000
Total monthly debt payments	$ 1,076	$ 1,162
Lifetime interest cost	$ 79,840	$ 81,010
Lifetime tax savings	$ 19,118	$ 20,253
Lifetime net cost	$ 60,722	$ 60,758

Plus, she notes, there is the psychological relief of having only one payment to deal with.

The one mistake that Beth made, and it's a common one, was taking an extra $6,000 in cash to pay property taxes, homeowners insurance and car insurance in full to earn some discounts. While the discounts added up to a few hundred dollars, the 10-year cost of paying those bills with borrowed money will be $2,244, even after deducting taxes on the interest.

Weighing the pros and cons

Financial planner Allvine, who is also the co-author of "The 7 Most Important Money Decisions You'll Ever Make," was intrigued by Beth's bold move -- and impressed by her thorough research. "Intuitively it seems like they made the right decision, but did they think about everything along the way? For them, this is an issue of after-tax costs."

For example, did the interest from the home-equity loan exceed what Beth could deduct for her student loans?

Apparently so. While most students can deduct up to $2,500 in student loan interest payments, there are restrictions based on income and how the loan was spent. "For various reasons, we can't deduct all of my student loan interest," Beth says.

Make a decision you can live with

While Allvine acknowledges that taking out a home-equity loan might not be a smart move for everyone, she applauds Beth and her husband for making a difficult decision about their debt that works for them.

"A lot of people have strong feelings about owning their home, free and clear," Allvine says. "This move wouldn't work for them. Having more debt would be too stressful," in part because they would see tapping their equity as a risky move, and a hit to their future savings.

But for others, like Beth, "they might look at their home and say, 'I'm sitting on a valuable asset, why not take out some of it to invest in a more immediate priority -- my change of career and quality of life.'"

Not just a numbers game

Whenever people talk about money, there's a tendency to make certain issues black or white -- something I see quite often on the Women in Red message board. Allvine says that many financial decisions are rarely so clear-cut.

What will make this debt consolidation move a success for Beth and her husband has less to do with the interest rates and monthly payments -- or even bromides like "spend less and save more." "Debt has an emotional component, and if you don't address it, you won't arrive at the right solution for you," Allvine says.

Will Beth feel she's made the right decision in five years, when they are still paying down the $35,000? "If she remembers that she made this move for her long-term sanity, then economically it was the right decision."

Published Jan. 24, 2007

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