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Defying the Bubble Babble

If you believe the headlines, now is just about the worst possible time to take money from your home. Average sale prices are falling, interest rates are rising, and, at least here in Colorado, foreclosures are so out-of-control that a leading state economist has predicted a recession next year. Well, we used equity anyway, and I've no doubt it was exactly the right move.

Keep your home out of harm's way
Why? We had thousands more in higher-interest debt due, as well as a tax bill to pay. Borrowing from our home allowed us to kill off those obligations while preserving existing cash for bills that are coming due in December.

But there are also risks. For one, we're using our home as collateral. If we default, we'll be broke and out on the street. That's why Bills.com co-CEO Andrew Housser says that it's best to exhaust other sources of financing for debt consolidation before tapping into home equity. "Using your house to pay off unsecured debt can be very risky. If you choose this route, make sure you leave yourself some financial breathing room, so that if something unexpected does happen, you will not risk losing your home."

What are some of his other favorite debt consolidation tips? Read on:

1. Borrow from your 401(k). Most retirement plans allow participants to borrow funds that must be repaid, with interest, over time. Still, it's better to pay interest to yourself than to a credit card company, which is likely to be charging much higher rates anyway.

2. Borrow from your life insurance policy. If you have a whole life policy as opposed to term insurance -- not always a great idea, but we'll get to that in another column -- you may be able to access the cash balance for personal needs while you're still alive. And you may not have to pay back the loan, as you would with a 401(k).

3. Negotiate lower rates. Asking for lower interest rates won't consolidate your debt, but it will save you money. And most credit issuers will be happy to accommodate. After all, American Express (NYSE: AXP  ) , Bank of America (NYSE: BAC  ) , Citigroup (NYSE: C  ) , and JPMorgan Chase (NYSE: JPM  ) earn zero from a default; they'll always prefer to collect what they can.

4. Play the balance transfer game. If you've got a good credit score, chances are you receive new card offers daily. Use one to consolidate debt at a miniscule rate. Just be sure to study the terms of the agreement; you'll want to know exactly under what conditions you'll be subject to a higher rate.

5. Borrow from a paid-off vehicle. Frankly, I hate this option, because I detest vehicle loans. Nevertheless, it's worth pointing out that secured loans always offer lower rates than unsecured loans. And it's obviously better to lose a car than a house.

Follow the money
Still, I'm glad to have tapped our home equity line of credit (HELOC). Using it will save us at least $300 a month and lower our tax bill. Meanwhile, after accounting for both our primary mortgage and the HELOC, roughly half the value of our home is still available as equity, which leaves us well within the margin of safety Housser recommends.

Have other money tips? Tell me. I'm writing new articles on personal finance and investing basics every week as part of our new money management service, Motley Fool GreenLight. It's tailor-made for Fools like you who aim to take control of their financial destiny. Click here to learn more.

Bank of America and JP Morgan Chase are Motley Fool Income Investorrecommendations.

Fool contributorTim Beyersthinks the bubble is no babble. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. Get a peek at everything he's invested in by checking his Foolprofile. The Motley Fool'sdisclosure policyhas lots of equity.


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Tim Beyers
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Tim Beyers first began writing for the Fool in 2003. Today, he's an analyst for Motley Fool Rule Breakers and Motley Fool Supernova. At Fool.com, he covers disruptive ideas in technology and entertainment, though you'll most often find him writing and talking about the business of comics. Find him online at timbeyers.me or send email to tbeyers@fool.com. For more insights, follow Tim on Google+ and Twitter.

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