- Home ownership can provide an asset you can borrow against to consolidate debt.
- It is rarely a good idea to consolidate credit card debt using your home as collateral.
- You risk losing your home if you cannot make the new debt payment.
- Credit cards offer fewer lender protections than a home loan, giving creditors the advantage if you convert unsecured debt to secured debt.
Almost everyone has debt. You use credit to purchase a home, buy a car, pay for college, and make everyday purchases on a credit card. When credit card balances creep up to the maximum limits, and you realize making minimum payments on thousands of dollars’ worth of debt does not move the needle, you seek faster ways to get out of debt.
When you own a home, tapping into the equity can seem like a good debt elimination plan. Home equity loans offer low-interest rates and long repayment periods. Before you apply for a home equity loan to pay off high-interest credit card debt, consider the risks of using the equity in your home as a debt solution:
- Your home is the collateral: The very thing that gives you better rates and terms can also be the biggest risk. If you fail to make on-time payments on a credit card, the lender has nothing to take for repayment. When your home secures the loan, the lender can foreclose on your house if you miss payments.
- Acquire even more debt: When you transfer debt from credit cards to a home equity loan, you now have open credit lines on your credit cards. If you have not addressed the underlying money management or income issues, those available credit lines can result in newly maxed out credit cards, leaving you in significantly worse financial shape than you were before.
- Long repayment: Paying only the minimum on credit card debt can result in 30 years of payments to eliminate large balances, assuming you stop using the card. Transferring that debt to a home equity loan will save money on interest, but longer repayment terms can still mean you spend 30 years paying off the debt.
- Loss of legal benefits: Credit cards have the lowest repayment priority in bankruptcy, where home loans are at the top. Transferring credit card balances to a home equity loan, even in bankruptcy, will require full repayment of any outstanding balances if you wish to remain in your home. Had the debt remained on the credit card, a judge could discharge the debt, legally freeing you from the obligation of repayment.
Other legal channels for credit card relief include credit counseling, an unsecured debt settlement loan, or debt negotiation. Each of these channels offers resources for outstanding credit card debt, but not for home loans.
When you use a home equity loan to pay off credit card debt, you are not actually paying off anything. Instead, you are transferring the debt or restructuring the debt. You still have the full balance to repay, interest to pay, and more risk if you fail to keep up with the payments. There are other, less risky, and more favorable options available. Some, like debt negotiation, do not require upfront funds, can immediately lower monthly payments, and do not require you to repay 100% of outstanding balances plus ongoing interest, lowering the long-term risk to your financial health.
