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Should You Use Home Equity Loan To Payoff Credit Cards Debt

 

Using Home Equity Loan to Payoff Credit Cards Debt

You may be struggling to bring your debt level down if you have large outstanding balances on your credit cards.

If you have been able to make only minimum monthly payments it could take years, or maybe decades, to zero out your cards.

If you own your home, you have the option of taking out a home equity loan to payoff credit cards debt.

But before taking any action always consider the risks associated and look out for other possible alternatives.

What is a Home Equity Loan?

Your home has accumulated equity over the years so a home equity loan allows you to borrow against that equity.

For instance, if the current worth of your home is $300,000 and you owe $200,000 on your mortgage, you have an equity of $100,000.

Based on your equity a bank, credit union, or other lenders may be willing to issue a home equity loan equal to some percentage of it.

Factors, such as your credit score will decide how much you can borrow and whether you can get a loan at all in the first place.

The main advantage of using a home equity loan to pay off credit card debt is that you’ll secure a much lower interest rate than what you are paying on your credit cards.

For instance, the average interest rate on a home equity loan is average around 5 %, while the average credit card could be ranging more than 19%.

When you use a home equity loan to pay off credit cards, it will also simplify your life, where you will have just one bill to pay each month instead of several bills.

Earlier the interest you paid on a home equity loan was tax-deductible, which has been suspended, at least for the next few years.

But credit card interest was not deductible. Because of the Tax Cuts and Jobs Act of 2017, only if you use the loan to either buy, build, or improve your home that secures the loan then the interest on home equity loans was deductible.

Now that provision is put on hold for at least until 2026.

The major snag of taking out a home equity loan to pay off debt is that your home would be on the line.

As your home serves as collateral for the loan, the lender could seize and sell it if you are unable to pay back your loan.

You’ll also face serious financial consequences, especially in your credit score when you can’t repay credit card debt.

As credit card debt is not secured by your home, you’ll be at far less risk of losing your home.

You can keep your principal residence even if you have to declare bankruptcy because of your debts.

Is a Home Equity Loan the Answer?

A home equity loan may be a good way to pay off high-interest credit card debt, provided everything goes as per the plan. It can also cost you your home in a worst-case scenario.

Conclusion

One alternative to be debt-free is to use a home equity loan to pay off credit cards.

Compared to most credit cards a home equity loan generally charges much lower interest rates.

The downside of using a home equity loan to pay off credit cards is that you could lose your home if you are unable to repay it.

To decide if it’s a practical option, you need to identify how strong or how the week is your current financial situation.

If you have a secure job or a means of a consistent flow of income and are confident that you’ll have no problem, keeping up with the payments, it could be ideal for you.

But if your job is not dependable and you have no other financial resources then a home equity loan could be a risky option.

https://www.compareclosing.com/blog/home-equity-loan-to-payoff-credit-cards-debt/

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