Should You Use a Home Equity Loan To Get Out of Credit Card Debt?
Written by
Gina Hagler
Edited by
Nicholas Morine
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When your credit card debt reaches a level where you’re only able to make the minimum payment — or no payment at all — after cutting your spending to the bone, you’re likely desperate. You may try a side gig or two, take on a second job or ask family and friends for help.
If all of that fails, you may consider a home equity loan to get out of credit card debt.
How Does a Home Equity Loan Work
A home equity loan, also known as a second mortgage, uses the equity in your home as security. Often, these loans are for terms of 15 or 30 years, and you’ll need good credit to qualify.
Pros and Cons
According to QuickenLoans, using home equity to pay off credit cards can save you money and simplify your finances. Other benefits follow below.
- Home equity loan rates are lower than credit card rates.
- You’ll have years to pay off the new loan.
- The interest on a home equity loan may be tax deductible.
Using a home equity loan to pay off debt is not all sunshine and rainbows, though. According to QuickenLoans:
- You’ll often need to pay fees to get the loan.
- You could lose your home if you find yourself unable to make scheduled payments.
- If you misjudge the housing market, you may find yourself with new financing on a home that is decreasing in value.
- By pushing your payoff date into the future, you may still be making mortgage payments when it’s time to retire.
Should You Do It?
Most people arrive at the point of taking out a second mortgage after exhausting all other options. If that’s the case, take some steps to improve your chances of success by:Â
- Getting a loan with a fixed rate
- Making sure there is no penalty if you decide to pay the loan off early.
- Borrowing only what you need so you are not inclined to spend through the rest.
- Taking a loan for less than the full equity in your home.
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