Should You Use a Home Equity Loan to Pay Off Your Credit Card Debt?Posted on April 6, 2012 by Jennifer in Credit Card Tips
You’re struggling with credit card debt. You’ve tried numerous debt reduction strategies in the past, and none of them worked out well for you. You’re being hounded by collection agencies. But let’s say you also own a home. With that kind of asset available to you, there has to be some way to leverage it to get out of your credit card debt, right? Right — you can do it through a home equity loan. Let’s look at how home equity loans work, why you might consider using one to pay off your credit card debt, and why it isn’t always a good idea to pursue this type of debt reduction.
What is a Home Equity Loan?
A home equity loan is a loan that’s secured by the equity you have in your home. In other words, you put your home up as collateral in case you later default on your loan payments.
The Appeal of Using Home Equity Loans to Pay Off Credit Card Debt
There are a few reasons homeowners might consider taking out a home equity loan to pay off credit card debt or other debts. For example:
- Your home equity loan will allow you to consolidate multiple credit card balances into one easier-to-manage payment.
- Home equity loans can have significantly lower interest rates than credit cards, which means you could save hundreds (if not thousands) of dollars over the course of your repayment period.
- The interest you pay on a home equity loan can be tax deductible whereas interest on credit cards isn’t. That can save you even more.
- Because the loan is secured by the value of your home, it might be easier to get a home equity loan than another type of debt consolidation loan.
- Using a home equity loan to pay off your various credit card balances can get creditors off your back as your balances are transferred to a new lender (and you get a fresh start).
The Downside of Using Home Equity Loans for Credit Card Debt
Given those benefits, it’s no wonder home equity loans can be tempting when it comes to paying off credit card debt. But before you rush out to apply for a loan, there’s a huge downside you should also consider.
When you turn your credit card debt into a secured home equity loan, you put your home on the line. That means if you continue to struggle with paying off your debt, you risk losing your home to foreclosure. Is that a risk you really want to take?
Have you ever used a home equity loan to pay off your credit cards? How did it work out for you? And after the experience, would you do it again? Share your stories or tips in the comments.