Should You Pay Off Your Credit Cards With Home Equity?

Ah, one of the questions for the ages. Shall you or shall you not pay off your credit cards with home equity? Let’s say you ran up a credit card on a bunch of crap you didn’t need and are now being charged 15%. You’ve seen the error of your ways, and now are interested in paying off your debt. How should you go about it? Should you use Home Equity? Blueprint For Financial Prosperity suggests that, while you may be saving big money by cutting your interest rate, you should think the decision over carefully.

“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.

So if you’re still the irresponsible home theater system charging rascal you once were, you might want to think carefully before you risk your house. You could use a 0% balance transfer, for example, to cut your interest without additional risk to the place where your children sleep. On the other hand, if you’re truly on the straight and narrow…—MEGHANN MARCO

Pay Off Credit Cards with Home Equity? [Blueprint for Financial Prosperity]

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  1. Pasketti says:

    We did this a couple of years ago, but as part of refinancing our mortgage.

    We had credit card debt, plus two car payments, plus mortage every month. When we refinanced, we rolled everything up into one debt, lowered the interest rate on the mortage by 2 full points, and literally cut our outgo in half.

    Since then, we’ve paid off the credit card in full every month, and still only have the one debt.

    It may not work for everyone, but it was one of the smartest things we’ve ever done.

  2. Starfury says:

    A big problem is that people confuse a want with a need. They’ll say “I need a new home theatre system” when all they need is a standard TV set that costs much less. Society has a “buy now, pay later” attitude.

    This is why the only debt I have is my house payment and a 0% interest car payment to the bank of dad. I also pay my CC off each month because I don’t like to pay interest.

  3. kerry says:

    My boss used home equity to buy a new car a few years back. Technically, she put the full cost of the car on two credit cards and then paid those immediately with the money from her home equity loan. The interest rate on the equity loan was way lower than those of the dealership and credit card companies, and she’s not beholden to the dealership for the next 5 years.

  4. medalian1 says:

    I wouldn’t do this as most people don’t stick to their new debit free life. For example …

    My brother bought a home 5ish years ago for 65K. Got into credit card debit, bought two trucks, a car … couldn’t afford everything. He refinanced his home and got a 125K loan (WTF) to pay everything off. Swore he cut up his credit cards and was on the straight and narrow.

    Fast forward two years … he bought more crap with the credit cards and traded in over-under on a car and pulled out a 20K line of equity on his home to get his cards paid off again + bought an $18K truck!

    So now he owes 125K + 20K and 18K on a new truck. It’s so sad because they have almost nothing to show for all of this debit. The combined income for him and his wife should’ve had that home paid off by now if they had managed their money better.

    I personally wouldn’t pay off a cc with equity.

  5. nullset says:

    The big problem here is that paying off your credit cards with home equity is that the debt will now be paid off at a lower interest rate, but over 30 years.

    You could be better off in the long term by keeping that debt on the credit cards and paying it off as soon as you can.

    Just my $.02, plus 15% interest.

  6. zentec says:

    It depends upon the line of equity.

    If you get a low rate with an equity loan that is basically a fixed-term loan of not more than 7 years then that’s not a bad deal. Think “traditional home improvement loan from 15 years ago”, that’s about the duration you want. As long as, which other posts indicate, you are disciplined and do not use the opportunity to run the cards right back up to their hilt.

    If you’re refinancing your mortgage and rolling all your debt into the new mortgage, then that’s just silly. You’ve taken unsecured debt and secured it with your home and now are paying on it for the next 30 years. It *might* be acceptable if the outstanding balance on your existing mortgage is exceedingly low and you are planning on doing a 15 year mortgage. But that’s only if there’s a very, very good reason you’re sitting in the credit card cesspool; like protracted unemployment or medical problems.

    The problem is that most people are woefully uneducated when it comes to making these decisions. Lenders know this, and pray upon the impulsive nature of most consumers.

  7. robdew says:

    Wow, this is bad financial advice.

    Stating that “if you can’t pay off a credit card, it’s not that bad” is just flat wrong.

    Failing to pay off a large amount of credit card debt is bound to ruin your ability to secure a mortgage, or for that matter may even influence your ability to rent an apartment or even get insurance or buy a car.

    Mortgage lenders are FAR more liable to work with you during hard times, and during that time your are paying half the interest of a credit card, which is probably tax deductible.

    It’s also a lot easier and financially sound to refinance your mortage in your favor rather than try to restructure unsecured debt, which is a red flag for your credit if you do it repeatedly.

    Finally, this author fails to point out one of the most important aspects of a home equity loan — your collateral is probably appreciating as you are paying off the loan. It doesn’t help you make payments, but it certainly makes getting out of the loan on a sound financial footing easier — you can sell your house!

  8. Daytonna says:

    Something that hasn’t been mentioned yet is that the intrest on a home loan is a major tax break. The intrest you spend on your home loan each year is a direct tax deduction. IF you are responsible enough to destroy the CC’s and never use them again, paying them and auto’s off with home equity is a good thing. Lower monthly TOTAL payments, and all the intrest is now tax deductable.

  9. pestie says:

    I met a guy once who worked in a fancy-shmancy New York City business that specialized in collecting “uncollectable” debts. His advice: “Never borrow secured when you can borrow unsecured.” I tend to agree with him, unless you’re a paragon of self-discipline.

    For me personally, though, it actually makes no sense at all to pay off my credit card with my equity, as my card has a 4.99% interest rate and my equity line of credit is variable (currently around 9%). But then, my card currently has a $0 balance, too, and I plan on keeping it that way.

  10. What about a home line of credit to pay off debt?

    I read an article about how instead of putting your paycheck in to a bank, put it in the home line of credit [most feature credit cards and work like a bank].

  11. theora55 says:

    IF you have the discipline to change your credit card habits, it might be an okay idea. As soon as you pay off all your credit card debt, you’ll get nice, new higher limits. If you go out and charge them back up, you’ve just created another debt problem.

  12. planetdaddy says:

    Just don’t use the damn credit cards. If you have to have them to live you are living beyond your means. Trim the fat. The following is a small list of things I did to zero out my debts.

    Turn off the cable
    Raise/lower your thermostat
    Buy your clothes from Target/Walmart
    Quit going out to eat so much
    Take cold/shorter showers
    Get a second job
    etc

    There are a million things you can do to save few cents/dollars here and there. When you add them up at the end of the month they turn into hundreds of dollars.

    I am entering my fourth year of credit card freedom. I still have them, and only use them for emergencies. Since I am not living beyond my means I have money saved and I am usually able to take care of most emergencies without putting anything on the card.

    It takes a while to get those debts payed off, but it is worth the work.

  13. Solo says:

    “…IF you are responsible enough to destroy the CC’s and never use them again, paying them and auto’s off with home equity is a good thing.”

    That is a really big IF. if you raked up enough credit card debt principal for the interest on that amout to make a significant difference on your taxes, you probably are not responsible enough to gamble your house refinancing.

    I do realize that some credit card debt is not caused by over-consumption, but I’m willing to bet those are small percentages, like fat people who are fat because some weird hormonal disease (1 in 55 millions)

  14. thrillhouse says:

    …to cut your interest without additional risk to the place where your children sleep.

    risk? risk. now there is an interesting and often overlooked concept.

    I wouldn’t do this as most people don’t stick to their new debit free life.

    Yes! Now there in lines the real problem. Paying off credit cards with a Home Equity Line (or HEL loan) does not accomplish anything – you’ve simply shuffled the debt around. This is a case of treating the symptom and not the disease. You still owe all of the money, you’ve just chosen to stretch it out over 30 years. The real win comes with behavior change. Many many people who fall for this very poor financial advice end up just like medalian1′s brother – even deeper that they were before. Acording to internal statistics, 78% of the time this is the case. The others are too caught up with asking how much per month? instead of asking how much?. Over the life of that loan, you’re going to shell out a ton of interest, and endup paying much more than you think.

    Also, you should never go into debt to create a tax shelter. You can get the exact same deduction by making a donation to your local church/favorite charity. Also, you’ll pay our more money in interest over the year than you will save on your deduction.

    Get on a real plan, stop spending more than you make, and pay of the debt with cash money. Stop looking for the easy way out – its not worth it.