You’ve seen the ads on TV: “Use the equity in your home to get out of debt!” The main problem with this statement is, of course, that when you use a home equity loan, or a home equity line of credit, to pay off your debts, you are in reality trading one type of debt for another. There are advantages to using a home equity loan to pay off debt, but it is important to do it the smart way in order to take advantage of your home equity loan. And it helps to know the dangers.
Pros: the advantages of using a home equity loan to get out of debt
There are some advantages to using a home equity loan to pay off your debts. There are often tax advantages (interest payments are tax deductible) and you will have all of your loans in one place, making it easier to keep track of the payments. Also, you will usually have a much lower interest rate. But this is pretty much where the advantages end.
Cons: the dangers of using a home equity loan to get out of debt
As mentioned above, you are still actually in debt when you take out a home equity loan. And some people take out the loan for years. Can you imagine paying off a credit card balance for 20 or 30 years? If you take a spread out home equity loan, even with the lower interest, you could end up paying up more over the life of the debt than if you practiced aggressive debt reduction and paid off the debts one by one.
But the biggest danger to using your home equity to get out of debt is the fact that now what was once unsecured debt is now secured — by your home. If you run into a rough spot and can’t make the home equity loan payments, you could lose your house. And that’s no small thing. When you leave your debt unsecured, you will still be bothered to pay it back, but creditors can’t touch your house. But once you fall behind on mortgage payments, it’s a completely different story.
Before deciding to get a home equity loan to get out of debt, first consider your other options. Can drawing up a debt redution plan work? Are there other steps you can take? Have you talked with your creditors to work something out? All of these are important points to remember when considering putting your house on the line to pay off debts.