Should you pay off credit card debt with a home equity loan?
If you have credit card debt, you may want to pay it off as soon as possible. The longer you keep a credit card balance, the more interest you are likely to accrue. And that interest could be expensive.
In fact, if you’re a homeowner and have high net worth, you might be considering taking out a home equity loan and use it to pay your credit card balance. But is it a smart decision?
How do home equity loans work?
If you have equity in your home, you can usually take out a loan against it, and that loan will be secured by your home itself. So let’s say your home is worth $300,000 and you owe $200,000 on your mortgage. This leaves you with $100,000 of equity.
If you owe $10,000 on your credit card, you could easily qualify for a $10,000 home equity loan depending on how much equity you have. In this case, you’ll use your loan proceeds to pay off your credit cards and then pay off your home equity loan in equal monthly installments.
The advantage of paying off credit cards with a home equity loan
The interest you will be charged on a home equity loan will generally be much lower than the interest rate you pay on your credit card balances. That’s why it makes sense to use a home equity loan to pay off credit card debt. If your credit cards are charging you an average of 15% interest but you qualify for a home equity loan at 7% interest, that’s a big difference.
Also, credit card interest rates may vary and your rate may increase over time. Home equity loans usually come with fixed interest rates. This not only makes your monthly payments predictable, but also helps ensure that your loan doesn’t cost more than necessary.
The downside of paying off credit cards with a home equity loan
A home equity loan is a secured loan, which means it is tied to a specific asset – your home itself. If you fall far enough behind on your mortgage payments, you could end up losing your home.
In contrast, credit card balances are not backed by any specific asset. If you fall behind on your minimum credit card payments, there will be consequences, like seeing your credit score take a huge hit and being unable to borrow money because of it. But falling behind on your credit card bills won’t put you at risk of losing your home.
Another thing you need to know is that you could pay closing costs on a home equity loan. The amount of these fees can vary from lender to lender, but this is another expense you could incur to make your credit card debt less expensive to pay off.
What’s the right call for you?
A home equity loan could make it easier to pay off your credit card debt, but if you decide to go this route, make sure you fully understand the risks involved. Also, make sure the payment plan you sign up for is one you can afford. If you’re able to keep your home loan payments manageable, you can eliminate credit card debt more affordably without putting yourself in danger of losing the roof over your head.
Alert: The highest cash back card we’ve seen now has 0% introductory APR through 2023
If you use the wrong credit or debit card, it could cost you dearly. Our expert likes this first choice, which includes a 0% introductory APR until 2023, an insane reimbursement rate of up to 5%, and all without annual fees.
In fact, this map is so good that our expert even uses it personally. Click here to read our full review for free and apply in just 2 minutes.
We are firm believers in the Golden Rule, which is why editorial opinions are our own and have not been previously reviewed, approved or endorsed by the advertisers included. The Ascent does not cover all offers on the market. The editorial content of The Ascent is separate from the editorial content of The Motley Fool and is created by a different team of analysts. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.