Using a home equity loan for debt consolidation

A home equity loan can be a very smart way to clear up credit card debt for two reasons:
1) home equity loans most often have a much lower interest rate than credit cards and other types of non-secured debt.
2) the interest paid on the first $100,000 borrowed is tax deductible where as the interest paid on credit cards is generally not tax deductible. Consult a tax advisor for the specific tax benefits available.

When you take out a home equity loan, you are reducing your equity or ownership in your home. Remember you are borrowing from a portion of your home that you have already paid off so that you can have money to pay off your credit card debt.

While a home equity loan may seem useful in clearing up your debt, there may be situations where a home equity loan may not be good idea for debt consolidation. Say for instance that you had $5,000 in credit card debt. Taking out a home equity loan is not free - in addition to interest there are associated closing costs. It would not be worthwhile to take out a home equity loan and incur closing costs to clear up a small amount of debt.

If however, you have a large amount of debt and the home equity loan interest rate available to you is much lower than your credit cards, a home equity loan makes sense.

Which type of home equity loan is right for you? If you have a huge credit card debt you perhaps lack financial discipline. For this reason, a Standard Home Equity loan and not a Home Equity Line of Credit is more suitable.

A standard home equity loan is a conservative loan choice that has fixed payments and a fixed interest rate. Home equity lines of credit should not be used for debt consolidation since a line of credit gives you the option of making minimum payments on the amount owing - this practice can lead to an unpaid balance at the end of your loan which is a very similar situation to credit card debt.