Dear Dr. Don,
I am almost 68, a widow and working part time. I have an equity line on my home that my late husband set up, which has an outstanding balance of $140,000 at 2.75 percent. The monthly payments on that loan are $315.48. I have one credit card that is maxed out at a balance of $8,000. I recently used my car as security on a loan to help my kids. I receive $1,819 per month from Social Security after the Medicare deductions, and that includes my widow's benefit, which is a joke! The net income on my part-time job is $290.12 every two weeks. I pay my bills on time, but I just don't have that much left. I have to pay for the grass to be cut and anything else that needs to be done. Is there any suggestion as to how to get a better grip on my household budget?
-- Diane Deplete
Your finances are spinning out of control. You have to get your household budget back in line. Having your credit card maxed out means you're living beyond your means. Financing past spending at credit card interest rates cuts into your current spending, and that just adds to the pressure.
Your current payments on the home equity line are interest-only. That doesn't last forever. These loans can be structured different ways. A common structure is one in which, after a period of time that's usually 10 years, you can no longer borrow against the credit line. The loan becomes self-amortizing, meaning the monthly payment increases to cover both principal repayment and interest expense. If that's how your loan is configured, your monthly payment could more than double when it becomes an amortized loan.
Review your loan documents or talk to your lender about how your loan is structured. You want to know when any changes will be on the horizon.
You've used your car as collateral on a loan to help your kids. I'm all for helping out the children when you're in a position to do so, but you aren't in that place. Who's making the loan payments? What happens if the payments aren't made and your car is repossessed? Will you have to quit your job because you don't have transportation?
This may seem counterintuitive after what I've said already, but if you have room on your home equity line to pay off the credit card, you should do it. The same goes for the loan against the car.
Then put the card away, and use it only for emergencies. Take the money you've freed up from making credit card payments, and use that to pay down your line of credit.
Can you afford to continue living in your house? If you're having trouble paying the lawn guy, how are you going to handle the need for any major repairs? It could make sense to sell the house and downsize into a home that is within your budget.
Put together a household budget that looks at how you spend your monthly income, and then decide how to adjust that spending so you can live within your means -- even if that means you need to move.
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