It is possible to use a home equity loan to pay off credit cards. A home equity loan is similar to a personal loan in that the borrower can do just about anything they want with the funds. That includes paying down existing debts. And in some cases, using home equity loans to pay off credit card debt might be a good idea. Home equity loan APRs are usually very low, around 4% to 8%. Credit cards are much more expensive, with the average APR for new offers at 19.29% and the average APR for all existing accounts at 15.09%. So using a home equity loan to refinance a single credit card debt or consolidate multiple debts could potentially save the borrower a lot on interest.
But before you go tapping in to your home equity, it’s important to know the dangers of the practice. For a little background, a home equity loan is a secured debt. You get to borrow a percentage of your house’s value minus the mortgage balance. And, most importantly, your house serves as collateral for the transaction. So down the line if you’re not able to keep up with the payments, the issuer might choose to foreclose on your house.
On the other hand, credit card debt is unsecured debt, which means the issuer doesn’t have any immediate way to collect funds from you if you don’t pay up. They’ll have to send your debt to collections. And if that doesn’t work, they’ll need to get a court judgment against you to garnish your pay or savings.
Another downside to home equity loans is that they can come with extra costs aside from the APR. You’ll need pay for an appraisal of your house, at least, and could have other closing costs as well. In addition, if the value of your home drops while you have the loan, you could end up owing more than it’s worth.
In conclusion, it may be worth using a home equity loan to pay off credit cards if you’re able to take advantage of low interest rates and are confident you can make the necessary payments. But if you think there’s even a chance you’ll have trouble making payments, it’s not worth potentially losing your house. And if you do pay off your credit cards with a home equity loan, be sure to limit your future credit card spending until you pay the loan back. You don’t want to end up with more debt than before.
One last thing worth noting – there’s something similar to a home equity loan called a home equity line of credit. It’s also secured by your house and lets you borrow based on the house’s value. But it works like a credit card, in that you can borrow up to a certain amount any time you want with no obligation to borrow. You can use money from a HELOC to pay off credit card debt, too.
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