Because banks and loan companies have been heavily advertising the advantages of home equity loans and home equity lines of credit, more and more people are choosing to take out these types of loans. One of the main reasons that people take a home equity loan is to pay off their existing credit cards and lower their monthly payments.
A loan against your home almost always has a lower interest rate than a credit card. Additionally, the interest from a home equity loan is often tax deductible, whereas the interest from credit card debt is not. That means that typically you can decrease your monthly debt payments – sometimes by hundreds of dollars – by taking out a home equity loan.
Credit card debt is unsecured debt. That means that none of your assets used to secure the debt. If you default on your credit card payments, a credit card company cannot foreclose on your house. Typically credit card companies will turn the debt over to a collection agency which can damage your credit, but they cannot take away your home.
On the other hand, a home equity loan is secured by your house. If you default on your payments to your home equity loan your bank can foreclose, meaning that you very well could lose your home. Not only that, but your credit takes a hit which makes it harder to try to refinance or take an additional loan to save your home.
Another simple fact that many people overlook is that you cannot borrow your way out of debt. If you take a home equity loan to pay off your credit cards you are still going to owe the same amount of money as you did before you paid off your cards. The only difference is that rather than owing the credit card companies you now will owe a bank that has interest in your house.
Not only that, but according to a survey done by the Consumer Bankers Association, 70% of people who had transferred their credit card balances over to a home equity loan were running up credit card debt again within a year. If you do decide to take a home equity loan, it is absolutely vital that you cut up your credit cards and do not continue to charge on them. Otherwise, you not only have to pay your home equity loan, but you will have to pay your new credit card bills on top of that which could leave you in a worse position than before you took a loan.
Other people are regretting taking home equity loans because the real estate market is taking a dive and property values are falling. Many people who took home equity loans over the past few years when property values were high are now finding that they owe as much or more than their house is worth today. You need to look at whether you plan to sell your home anytime in the near future before taking out a home equity loan since it can leave you in a bind if property values continue to drop.
In many cases it is smarter to try to negotiate lower interest rates or smaller payments with your credit card companies rather than risking your home by taking out a home equity loan. If you are not comfortable negotiating with your credit card companies on your own you can always talk to a consumer credit counseling service to help you lower your monthly payments.
You may be surprised at how much lower you can get your payments than they currently are. Not only that, by taking steps to pay off your debt on your own without borrowing against your home, you are not only protecting your home but are setting yourself up for a brighter financial future.
