Introduction
Some people will use a home equity loan credit to pay off large credit card debts. The thinking is that they can save money by consolidating debt into a lower interest rate loan. If home equity loan credit are standing at low interest rates--around 5% that is true. However, you do need good credit to get low-interest home equity loan credit. Most people that have a lot of credit card debt will not be able to get a home equity loan credit, because their credit score is low.
Step 1
If you have good credit, and still have a lot of credit card debt (which is possible), a home equity loan credit might be a good idea to consolidate and save more. However, this could back fire, especially if home values drop and you want to sell your home. Also, if you cannot make the home equity loan credit payment and your mortgage payment, you risk a foreclosure. If you are forced to make a larger mortgage payment, you may run up your credit cards just to pay the bank.
Step 2
Misconceptions: Paying off credit card debt with a home equity loan credit is an always good idea. If you can get a low interest rate on the home equity loan credit, paying off your credit card will save you money over the long run. It will also result in lower monthly payments, since the home equity is stretched out over 10 to 15 years, and even as much as 30 years.
Step 3
However, you will pay a lot of interest to the bank over those years. You also put more risk on yourself. Missing your equity payments could result in foreclosure, while missing a credit card payment can only result in a lower credit rating.
Step 4
Risk Factors: Taking on a home equity loan credit puts the risk of losing your home onto your shoulders, in the form of an extra monthly payment. Missing this payment can result in foreclosures. The other risk is a higher interest rate on a car loan or personal loan, should you need one. When you stretch out your credit among credit card balances and your home, it affects your credit score. Carrying large balances on a credit card, or home means a lower score.
Step 5
Benefits: A home equity loan can consolidate your credit card debt. Putting all your credit cards into a home equity loan means you only have one payment to think about. Typically, since this payment is stretched out over many years, it is lower than your credit card payments. Credit cards typically have a high interest rate.
Features
This means you are paying more each month to the credit card company and less towards your debts. A home equity with a lower interest rates means you could end up paying a little less each month towards your mortgage debt, and free up some cash for other expenses.
Comments
The Facts: A home equity loan gives you a lower payment each month so you have more time to pay down your debt. Credit card paybacks are based on a shorter time period, so they typically cost more each month and have a higher interest rate.
