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.
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I agree with this 100% and is a sensible way to pay off high interest debts. It is always better to pay off a credit card loan which is a much higher APR with a home equity loan that you can secure against your house, which is going to be much cheaper. However it is prudent to ensure that you can pay off your home equity loan and not put your house at risk. Also when the credit card loan is paid off, you could overpay on your mortgage so the loan is paid off quicker. People with
new homes should consider how much they have in equity before taking out another loan.
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