Q&A: Should I use my home equity to pay off debt?
Question: Should I take out a home equity loan to pay off my credit card debt?
Answer:That’s a great question and one we get all the time at the office when talking to people about how to get out of debt and free up cash flow. First, know that there are two different types of loans you can take out on the equity you’ve built up on your home.
A home equity loan (HEL) is essentially a second mortgage which allows homeowner to borrow a lump sum from the bank using the equity in their property as collateral. This loan generally has a fixed interest rate and a term of ten to fifteen years.
A home equity line of credit (HELOC) is a revolving credit account that allows the homeowner to borrow money repeatedly, as long as the HELOC’s credit limit is not exceeded. HELOCs generally have variable interest rates.
In many ways, especially if you eventually want to either pay off your mortgage or move to a different home, taking a loan against the equity in your home to pay off another loan is not the most effective road to becoming debt free. It may seem like a good idea since interest rates on home loans have been very enticing and are generally lower than other loans. Yet, simply put you are robbing Peter to pay Paul and instead of paying the debt off, you are just moving it around. Also, if you go behind on your payments you run the risk of losing your home. There are different, and safer, ways to pay off your debt.
A concrete way to pay off debt is to really look at your spending habits and see where you can cut down. Create a strict budget and instead of finding new ways to “borrow” money, really try and evaluate where you may be wasting money. If after budgeting and cutting out luxury expenses you still can’t make more than the minimum payments then it may be time to ask for help.
There are other very effective options like a debt resolution program to help you get yourself out of debt. However, be aware of scam companies and only go to a reputable, licensed company or a lawyer. Since the sum total of your monthly payments could be significantly lowered, you can free up cash flow and put your finances back on track. Resolving the debts instead of simply moving the debt, can help you maintain or improve your financial lifestyle.