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Pay Off Credit Cards with Home Equity?

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Should you pay off your credit card debt with equity from your home? My simple answer is no but honestly it isn’t a simple matter at all.

Let’s take the case of Mr. Joe Smith who is carrying $15,000 in credit card debt, charging him 15% interest each year. Let’s assume that Joe Smith has learned the error of his ways, despite watching his home theater each night, and is now on the righteous path of financial prosperity and has stopped hemorrhaging money – now he wants to make right. Despite his credit card irresponsibility, Joe actually has quite a bit of equity stored up in his home and has considered taking out a line of credit to pay off the credit card debt. By lowering his rate from 15% to something as low as 6%, which is tax deductible, you’re talking about a savings of a good $1,500 a year. That’s serious money and that’s the main benefit of doing it.

So what’s the risk? The big risk in doing this is that if you can’t pay off a credit card, it’s not that bad. Since it’s unsecured credit, they can’t come and legally seize anything (unless you go bankrupt, and even then your home could be safe if you live in a state like Florida). If you pay off your credit card with a home equity loan and then you can’t pay off that home equity loan… they will come and take your house.

Ultimately, moving shifting your debt from credit to home equity is a risky endeavor that has a significant payoff if you can remain responsible (a characteristic that, arguably, you may not have exhibited when you racked up the debt). If you can’t, you can take a bad situation and make it much much worse. If you can swing it, it might be better to see if you can utilize a 0% balance transfer to pay off that debt. Swapping one unsecured debt for another is better than swapping it for a secured debt – plus, 0% balance transfers offer a lower rate even though it would be for a shorter period of time.

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9 Responses to “Pay Off Credit Cards with Home Equity?”

  1. Debt Hater says:

    I’d think that short term 0% rate would motivate you to pay off the debt as fast as you can. And I’ve read enough to never considered using a home equity loan to pay off credit cards (not that I’ll ever have credit card debt once I buy my home!)

  2. Yes a 0% rate is ideal, but if that’s not possible I think it really is worth looking into using a home equity line of credit. If you ever get to the point of not being able to pay back your home equity line of credit you could always get a cash advance on that credit card you paid off. That’s the worst case scenario after a worst case scenario. If you’ve really gotten to the point of the cash advance on your credit card, you’ve already failed handing your credit card the first time as well as this reform attempt. After all that you are probably still better off having paid the cash advance fee and saving the difference between 20%+ interest and 8%+ interest.

  3. InsultComicDog says:

    I did it the other way around.

    Paid off the HELOC with the 0% 0-fee BT.

    Now the house is paid for but I have credit card debt.

    Just to cover my butt I left the HELOC open with 0 balance in case I have to transfer back to it before the teaser expires and there isn’t another 0% out there for me.

  4. sissy says:

    is it good to pay off all the credit card dept if you could or is it better to leave some kind of balance on them,,,to keep the credit report in good shape ???

    • jim says:

      The payoff in terms of credit score improvement isn’t big enough to warrant continuing to pay interest on the debt, so no, pay off the debt ASAP. There are plenty of opportunities in the future to pay off a debt that doesn’t cost you 20%+ (like a car or a mortgage) if you want.

  5. Great post I completely agree about not using a home equity loan to pay off credit cards. After being in the debt reduction business for as long as I have. I have spoken with many people who have done that, and then guess what. They go and turn right around run up their cards again and bam not their right back where they were with the credit cards but now they have a bigger mortgage to pay and must file bankruptcy. I feel the best way to reduce debt is through debt settlement. YOu save money and time, the only negative thing is the temporary reduction in your credit score, but that will go back up as soon as your debts start being paid off. Ofcourse you do need to make sure you hire the right organization to do so.

  6. Alice McDaniel says:

    I have about $20,000 of credit card debt between two major credit cards and I do not want to turn unsecure debt into secured debt so I don’t dare use my equity to pay off these two cards. I would like to do a debt settlement but I don’t know what organization I can trust. Do you have any suggestions?

    avmcdaniel@verizon.net

  7. First of all, I am planning to roll my Car Loan, Credit Card and any other loan out there that I have into my Home Equity Line of Credit (HELOC) as it grows enough to take it in. Why you might ask? Because most people do not know how to do their finances. First of all, did you know that by taking out a HELOC or even a Personal Line of Credit it is possible to reduce your mortgage from 30yrs to 10 years or less? You don’t have to refinance, your mortgage payments remain the same, and there is little to no house budget change. Most people use checking accounts and savings accounts which get taxed at the end of the year so there goes your interest earned. A HELOC can be used just like a checking account. Difference between HELOC and mortgage is that one is compounded monthly and the other (HELOC) daily. So if you paid all your monthly bills from your HELOC and then deposited your paycheck at the same time. Your interest paid at the end of the month is 0%. Since it calculates daily there is no time for it to build interest. Now, if you take out lump sumps of money and paid it to your Mortgage it will take off years and save interest on the mortgage. Well, what about the debt I created on the HELOC? Well, you know all that money you were sending to your savings account (even if it isnt that much)? That pays down the extra balance so you dont have to worry about trying to bring it down. So, now I add on my car loan and guess what? Rather than paying my mortgage+car off in 10yrs, it will now be even less. How’s that you ask? Lets use imaginary made up numbers so you get the idea. If my car payments were lets say $500/month for 60 months, it has now been spread over to 120 months and lets say $250/month. Can we agree that now my payments are now smaller because the car loan has been stretched out twice as long? Well, can we agree that the money that is no longer being used for the car loan payments ($250) is now discretionary and is now being applied together with your left over money a month towards bringing down your HELOC? And so your HELOC drops faster allowing you to take out more lump sums to pay off your mortgage. Yes, I am an independent agent for United First Financial (u1stfinancial.com). The cool thing is that I pretty much just told you what they tell you themselves on their site on how to pay off your mortgage. Yes, I do sell a software that makes it all possible to be as effective as possible and keep you out of financial troubles if you decide to do your finances like this. If you would like to get a free analysis, and no I do not need any real information for now because I use John Doe as a profile for anyone who is interested in getting some numbers, email me. I do this and give this free information out to people because I do not depend on this for my money. I actually have a real job (not realestate or banking) and do not dedicate myself to selling this program like someone who only makes there living off this. So don’t be afraid to email me if you want more information or would like to get on the program. jmrdrgz@hotmail.com

  8. obadmae says:

    I have about 6000.00 high interest (24.99%) total credit card debt. I am considerating and have been approved for a home equity line of credit. I have a new home and only owe 45,000.00 should I use the credit line at 4.50% to payoff the credit card balances or forgo it and just keep making payments on the cards.


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