What to Know About Using Home Equity Loans for Credit Card Debt Relief

Embattled sailors have a saying; “Any port in a storm.” However, you might want to choose a bit more judiciously when it comes to home equity loans and credit card debt relief.

While there are indeed a number of very sound reasons to use one, there are more than few reasons why it isn’t a good idea too. Here’s what you need to know about using home equity loans for credit card debt relief.

What is a Home Equity Loan?

Simply put, equity is the difference between what your home is worth and how much you still owe on it.  Let’s say your house has an appraised value of $575,000 and you’ve paid all but $100,000 of your mortgage. This means you have $475,000 worth of equity in your home.

To access it, you’ll need to refinance your home based on its value beyond the outstanding balance of your current mortgage. You’ll then be handed whatever amount you request, less the associated closing costs, lender’s fees and etc, along with a fixed repayment schedule to meet.

Why Do This to Pay Off Credit Card Debt?

Basically, you’re consolidating all of your credit card debt into that home equity loan when you use its proceeds to pay off all of your credit cards.

There are quite a few advantages to doing this.

You’ll get a lower interest rate on that debt because the APR on a home loan is much lower than that on credit card debt. This means you’ll be able to pay it off faster and with less money. Lower monthly payments usually result as well. The exact payoff date of that debt will be established and you can get a fixed interest rate rather than a variable one. This will make your budgeting more predictable.

Arguments Against Doing This to Pay Off Credit Card Debt

The biggest negative here is trading unsecured debt for debt secured by an interest in your home. The former type of obligation can be dealt with in a number of different ways, including debt management, credit card debt relief and bankruptcy.  The latter cannot be subjected to debt settlement or negotiation. Nor can it be discharged in bankruptcy court.

You’ll be on the hook for that home equity loan and your only ways out of it will be to pay it off, or allow your home to be sold out from under you. This is why financial experts strongly caution against trading unsecured debt for secured debt.

Another thing you need to look at closely before implementing this strategy is why you’re having problems paying off your credit cards in the first place. Take some time to identify and address those causes before taking a home equity loan for this purpose. Otherwise, you’ll owe even more money if you use the loan to clear the credit card balances and run them right back up again.

And yes, this happens more often than you might care to believe.

The Bottom Line

All of the above factors should be weighed carefully before using home equity loans for credit card debt. Moreover, there are many other ways to approach this problem — especially if your credit score is good enough to get you a home equity loan in the first place.

Look into credit counseling, consider getting a balance transfer credit card or try getting an unsecured personal loan. The very last thing you should do is put your house at risk. While any port in a storm might be a good idea when you’re in trouble at sea, you should always protect your homeport when you’re in trouble on land.

 

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