As mentioned in our previous blog post, one way to consolidate credit card debt is by taking out a home equity loan. If you’re a homeowner, you may be able to take out a loan or line of credit on the equity in your home and use it to pay off your credit cards or other debts.
A home equity loan is a lump-sum loan with a fixed interest rate, while a line of credit works like a credit card with a variable interest rate. A HELOC often requires interest-only payments during the draw period, which is usually the first 10 years. That means you’ll need to pay more than the minimum payment due to reduce the principal and make a dent in your overall debt during that time. Since the loans are secured by your house, you’re likely to get a lower rate than what you would find on a personal loan or balance transfer credit card. However, you can also lose your home if you don’t keep up with payments.
You may be considering tapping your home equity to consolidate your credit card debt, a move that can lower your interest costs but has risks. Because of these risks, NerdWallet recommends that you reserve home equity for certain circumstances.
Consider these pros and cons:
- Interest rates on home equity loans and home equity lines of credit (HELOCs) are typically lower than those on credit cards.
- Interest paid on home equity loan products may be tax-deductible; credit card interest is not.
- With your house as collateral, you risk foreclosure if you can’t pay.
- If your home’s value drops, you could wind up owing more than it’s worth.
- Repayment terms can be 10 years or longer.
- The loan itself doesn’t address troublesome spending habits.
- Credit card debt is more easily discharged in bankruptcy.
Homeowners with good credit are likely to have other debt consolidation options that don’t risk their house. A homeowner with shaky finances shouldn’t move unsecured debt that can be erased in bankruptcy to secured debt that can’t.It’s debt-crushing timeSign up to link and track everything from cards to mortgages in one place.
Consider other options first
The two questions to ask when considering any strategy to consolidate credit card debt are:
- Will this plan allow me to pay off my consumer debt within five years?
- Is my total debt less than half my gross income?
Why five years? That’s the maximum time you’d be required to make payments toward Chapter 13 bankruptcy or a debt management plan, after which your debt would be fully retired. Chapter 7 bankruptcy would wipe out your debt immediately and get you on a path toward restoring your credit.
Options for smaller debt loads that don’t put your home at risk include:
0% balance transfer card: For people with good or excellent credit, issuers offer balance transfer credit cards with introductory no-interest periods from six months to two years. This is usually the cheapest option for those who qualify.
Personal loan: For most borrowers, interest rates on debt consolidation loans are lower than rates on regular credit cards. The rate you get depends on your credit history and income.
At Telco Credit Union, we offer competitive home equity loans – both fixed and variable rate home equities. If you have questions about these types of loans or are ready to get started with us, contact us today! We’re here to help with all your financial needs.