Credit Card Debt with a Home Equity Loan
cards can be a great convenience, but the interest rates charged on
unpaid balances are usually much higher than those found with home equity
loans. If you have significant credit card debt you should consider
paying off the credit card balance by getting a home equity loan. If
you itemize your tax deductions you may save some taxes too.
credit cards now require a minimum payment of 4% of the outstanding
balance. Paying that same amount on a home equity loan with a lower
interest rate will enable you to pay off the balance much faster.
a home equity loan to pay off credit card debt can be an effective way
to use the equity in your home as an effective financial tool.
does a home equity loan work?
You may get a special check or have a "line of credit" that
you can access as "overdraft protection" against your checking
account. There are usually forms to sign and an approval process that
is not too difficult. There may be some form of commitment fee.
amount you can borrow depends on the amount of equity in your home and
your other credit characteristics. A general rule of thumb is that you
may be able to borrow up to an amount so the total debt against your
home (including the first mortgage and any other loans where your home
is pledged as collateral) is less than 75% or 80% of the current value
of your home.
interest rate charged will usually be variable and will be tied to some
published index, like the prime rate. Be sure to check out the rate
you repay the loan in regular installments and with minimum repayments
required. With some home equity loans, the minimum payments may only
be the interest on the loan and you may be required to repay the loan
at a certain date.
of the risks
Borrowing against the equity in your home should be considered carefully.
Even though there are benefits, these types of loans are like other
loans - you pay interest and they must be paid off. Most people use
home equity loans for "conservative" purposes and avoid making
risky investments or extravagant spending with the proceeds.
and understand all the details before signing. Loan documents can be
confusing and the easy process of getting this type of loan can mask
the costs and risks.