Should you use home equity to pay off credit card debt? Here's when it can backfire.
Summary
Using home equity loans or home equity lines of credit (HELOCs) to pay off credit card debt can lower interest costs, but it carries risks. Homeowners need to be careful because these loans use their homes as collateral, which could lead to losing the home if they can’t make payments. Also, longer loan terms and fees can mean paying more overall, even with lower monthly payments.Key Facts
- Credit card debt often has high interest rates, making balances hard to pay down.
- Home equity loans and HELOCs use your property as security, unlike credit cards.
- Falling behind on home equity loan payments can lead to foreclosure.
- Lower interest rates on home equity loans can reduce monthly payments but may increase total interest if spread out over many years.
- Home equity loans may have closing costs and fees that add to the total expense.
- Using home equity to pay credit card debt doesn’t stop credit card balances from growing if new charges continue.
- Homeowners should carefully compare total repayment costs, not just monthly payments, before borrowing.
- This strategy is riskier if a person has an unstable income or is already financially struggling.
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