I received this note from "Di," a reader but not a current DebtIntoWealth client...

"Well, I have been religiously reading your e-mails for some time now....last week my husband and I refinanced...I know this is not high on your list... but boy does being 'out of debt' kinda feel good... I have cut up all the credit cards.....we refinanced at 5.25 per cent, went to every two weeks mortgage instead of monthly...and reduced our amortization to 17 1/2 years....after five years we'll reduce it to 5-8 years....I love all your articles... and inspiration...let me know what you think of what we did...we got rid of $31,000 debt by refinancing...getting rid of those high interest credit cards...and paid off a 10 year student loan which was $300/mos. It really hasn't hit us yet...it will come the end of June..."

-- Di.

Di is clearly motivated and has taken action on their debt situation. Any action sure beats naively giving your wealth to your creditors. My response to her question regarding what I thought of what they've done comes down to a common misperception about debt...

Consolidating debts doesn't get you "out of debt."

So... the "good feeling" is temporary... at best.

If you believe consolidation... i.e., refinancing your home for more than you owe and using the excess debt to "pay off" other debt gets you out of debt, do a little math...

Total ALL of your debt before consolidation. For example, $100,000 mortgage balance + $31,000 other debt = $131K total debt.

Now, borrow against -- refinance -- your home for $131K, converting $31K of home equity into debt. Use the excess $31K to "pay off" the other debt.

How much total debt do you have?

That's right, $131K. It's all in the home mortgage.

The Before and After debt totals are identical.

The possible negative side-effects are not.

Home equity is a form of wealth. If you convert it into debt, you increase the risk of losing your home. I understand the 5.25% interest rate attraction and the illusion of fewer bills to pay, but it's fool's gold.

Put another way...

When you consolidate your credit card debt using your home, you've pledged your home as collateral for whatever you purchased with credit cards.

Considering some of the stuff I used to purchase when I used credit cards, none of it was ever worth possibly losing my home.

 I really agree with what you've said here, Greg. I've felt like the Lone Ranger at times, when I've said that home equity loans are not a good thing. I think this again is something that's been marketed to us with a lot of hype

Fool's gold, indeed. 

A rose by any other name is still a rose:  debt is debt, only the name has changed from credit cards to home equity.

Nobody EVER became debt free by taking on more debt OR transferring it and changing the name.

I've often heard it described as...

You can't borrow your way to debt-freedom.

And while I'm not a proponent of the debt shell game, wouldn't it be wiser to decrease your secured debt -- secured by your home -- and increase your unsecured debt -- secured by your signature?

Yes. You can default on either. But the consequences are dramatically different.

-------------------
Greg Moore is the Creator of the Wealth Building System
'DebtIntoWealth -- Lessons from My Journey to Debt Freedom'

   "My husband is due to retire from the Navy in just two
    years at a young 42 years old, and right around then,
    using your system, we'll be completely debt free, which
    means  we could literally never have to work another day,
    if we choose."    -- Andrea Davis, South Korea

You CAN get out of debt and break the addiction. Click now:
http://www.debtintowealth.com/stretcher.html

 I have read various financial books and sites. And from them, it seems that people think they are doing themselves favors by consolidating debt to one lower interest rate loan which lowers their total monthly payments.

How many people who are thinking this really end up paying the total off earlier than they would have by doing this and also really save more money?

HI Brandy,

As your post implies, many are baited into consolidating because of lower monthly payments and rationalize it by believing they will use the increased cash-flow to pay off their debts. Research shows, however, that 70% of Americans who consolidate debt-card debt have as much or more debt two years later. People who consolidate could improve their results somewhat by destroying their ability to instantaneously create debt -- i.e., destroy their debt-cards -- but fear tends to nullify this option. Usually it's fear of some catastrophe, but lately fear of injuring their FICO score is becoming more prevalent.

Ironically, their FICO score is likely what got them into this situation in the first place.

 -------------------
Greg Moore is the Creator of the Wealth Building System
'DebtIntoWealth -- Lessons from My Journey to Debt Freedom'

   "My husband is due to retire from the Navy in just two
    years at a young 42 years old, and right around then,
    using your system, we'll be completely debt free, which
    means  we could literally never have to work another day,
    if we choose."    -- Andrea Davis, South Korea

You CAN get out of debt and break the addiction. Click now:
http://www.debtintowealth.com/stretcher.html