Should You Use Your Home's Equity To Pay Off Credit Card Debt?

When debt looms high and there doesn't seem to be enough funds left over at the end of the month, you may wonder how to get out from under a mountain of debt. You may have been using your credit card to help pay for groceries or gas and now your limit may have been reached. While you may not think you have any extra funds, it may be possible to use your home's value to pay off that debt. The question becomes, should you?

What is Home Equity?

If you own a home, after a period of making mortgage payments there will be a portion of your house that converts into equity. This means you own a portion of your home and not the bank. This equity can be withdrawn and used toward whatever you may require financially and this includes paying off debts such as credit cards.

A home loan acts much like a second mortgage, in which a certain amount already paid off on your mortgage is loaned to you for a certain length of time. Once the loan term expires, you make payments plus interests toward the loan.

Why Pay Off Debt Using Home Equity Loans?

You might be wondering if it is better to simply pay at least the minimum required toward a large debt rather than get this type of loan. If you are carrying a balance, especially into the tens of thousands of dollars, it might be prudent to use an equity loan to pay it off.

For the most part, equity loans have a variable interest rate (much like certain mortgages) which tends to be a smaller rate than your credit card may have. This lower interest rate can help you actually pay more toward the principal you owe rather than the added on amounts.

More Flexibility in Payment Schedule

Unlike other forms of loans, a home equity loan usually has a more flexible repayment schedule. While you will most likely have to pay something each month, the term of the loan may actually be longer than traditional loans. It is also more flexible in terms of borrowing the money to begin with. In most cases, you are able to withdraw a larger amount against the house than you could potentially receive from personal loans.

The Fear of Foreclosure

If you do opt for an equity loan, you might fear foreclosure if you are unable to pay back the loan on time. For most, this is an unfounded fear since they do have the means of paying back what they owe in due time and the length of the loan is usually a great deal longer than other types of loans.