Reader Question: Should I Use a Home Equity Loan to Pay Off Credit Cards?
Every now and again a reader asks a great question that I feel should be answered for the benefit of all. Today’s question certainly qualifies:
All this talk of recession has me concerned about paying of my credit cards. Should I use a home equity loan to pay them off?
This is a great question, since it comes up so much in terms of debt consolidation. Many ads on TV, despite current worries over the mortgage market, still tout debt consolidation home equity loans as a way to pay off credit card debt.
Advantages to using a home equity loan to pay off credit card debt
There are some advantages to using a home equity loan to pay off credit card debt. There are tax benefits, and the interest is lower than what you are paying on your credit cards. Plus, it helps you get your payments down to one a month, making your personal finances easier to manage. That’s about where the advantages end.
Disadvantages to using a home equity loan to pay off credit cards
There are definite disadvantages to using a home equity loan to pay off credit cards. One of them is the fact that you will have to borrow against your home. This is a tangible asset. You are taking unsecured debt (credit cards) and securing it (with your home). Do you want to risk your home for credit cards?
And, with current mortgage market concerns, you may find that 1. you don’t have as much equity as you thought you did and 2. you could end up in a negative equity situation. Neither of these things is pleasant.
Other options
It is possible to consolidate your debt through other types of loans, or through an agency (watch out for fees, though!). You can also use aggressive debt reduction to pay off your credit cards faster, one by one. Also, if you are very disciplined, you can think about using credit card offers for 0% intro rates to your advantage. But be careful to cancel excess credit cards as you pay them off.
Tags: home equity loan, mortgage loan blog, home mortgage loan, pay off credit cards,
second mortgage, debt consolidation, aggressive debt reduction
