Borrowing from your Home’s Equity to Pay off Credit Card Debt
Many credit card holders, particularly in this tough economy, are finding themselves in over their heads with credit card debt. Many homeowners may be tempted to use the equity in their home to pay off this debt. But is this the right choice for you?
Refinancing your Home
Many consumers choose to refinance their homes in an attempt to pay off crippling credit card debt. If you have enough equity in your home to completely pay off your credit card debt, then going this route may be an option for you. Refinancing your debt into your home loan can lessen the burden of paying several bills each month; instead, all of the debt is rolled into a single mortgage payment.
Although using the equity in your home to refinance your home and pay off your credit cards may be the sensible choice for many homeowners, it is not without its disadvantages.
First, refinancing a mortgage typically involves closing costs, which can total several thousand dollars. Although many lenders will roll closing costs back into the mortgage, you must still pay them. Another disadvantage to using your home to pay off your credit card debt is that, unlike credit card bills, you can lose your home if you default on the loan because your home serves as collateral for the mortgage.
Obtaining a Home Equity Loan or Line of Credit
Another option for paying off your credit card debt with your home’s equity is to take out a home equity loan or line of credit. Closing costs for home equity loans are generally much lower than closing costs for refinancing. However, the interest rate for a home equity will usually be higher than a typical home loan. For many consumers, the higher interest paid on a home equity loan, however, is still lower than the interest rates on their credit cards.
It is important to understand that a home equity loan or refinance can serve as smart financial tools when you simply want to pay off your credit card debt using your home’s equity. They may also be a better financial choice, as the payment for a refinance or home equity loan will typically be much lower than credit card minimum payments because the loan is extended over 20 or 30 years.
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