Paying Off Consumer Debt: Home Equity Or No Home Equity?

If you have consumer debt, you’re probably looking for a strategy to pay it off. Some people use a home equity loan as a way to get a lower rate, others use 0% balance transfers, still others just call their credit card company and ask them to lower their rates.

What should you do? Here are few differing view points and strategies from personal finance bloggers who’ve been there.

Don’t Use Home Equity To Pay Off Unsecured Debt [Blueprint for Financial Prosperity]
Using a Home Equity Loan to Pay Off Credit Cards [Get Rich Slowly]
Ready to Tackle Your Debt? Two Alternatives to Home Equity Loans [Get Rich Slowly]

(Photo:Ben Popken)

Comments

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  1. Tux the Penguin says:

    I think the real sticking point here is the ability to stick to not taking on new debt. If you can hold yourself to not doing just that, take money from any lower-interest source that you can, assuming that the fees from doing that don’t erase any future savings you have.

    If you can’t stop yourself from taking on new debt, you’ll end up in worse shape.

  2. secondgreatdepression says:

    There’s always moonlighting – a second job can help you pay down the debt without having to refinance or tap home equity or what have you. I went from $14,000 of credit card debt in September 2006 to having only $1,800 left.

    Working more sucks, but the lightened debt load salves that pretty well.

  3. rjmatm says:

    I got rid some debt from a couple of cards a few years ago by getting a consolidation loan and paying back to the bank on a fixed rate.

    Are those still offered?

    P.S.
    I have not had a credit card since and don’t plan on getting any.

  4. 01GTB says:

    Tux, agreed. This has happened to a number of my friends. They turn around and rack up new credit card debt almost as soon as they paid them off. For many, (certainly not all) paying the cards as agreed, no home equity loan, no BT, would save them money in the long run. You experience how much it hurts to pay hundreds of dollars in interest a month, I guarantee you will be less likely to let it happen again.

  5. stinerman says:

    I’d think whatever gets them the best APR would be the best. If you can do that with balance transfers or home equity loans, it doesn’t really matter.

  6. ceejeemcbeegee is not here says:

    Radical thought coming: a HELOC can be a good thing if used responsibly. Would you rather have $50K and not need it, or need $50k and not have it?

  7. quail says:

    One problem for those people pulled into home equity loans from a few years ago is that the houses were over valued. Buy a house and 3 months later discover it’s worth $20,000.00 more? Great. Pull out that equity! An equity loan should be the last resort and only if it’s true equity. Not the scenario I gave above. Debt is debt, and some debt is much worse than others.

  8. sleze69 says:

    Right now, unexpected house repairs may require that I keep a balance on a credit card for the first time in years. If I have to, I will just get a 0% balance transfer card and pay it off in like 5 months.

    It sucks carrying a balance but sometimes you gotta do what you gotta do.

  9. aikoto says:

    How is home equity ever a good idea? Let’s give some piddly lender a partial claim on your house and control over forclosing if you don’t manage to pay them. Sounds like a winner!

  10. sleze69 says:

    @aikoto: Lets say you have $30k in real equity (principal paid over the years). Taking a $30k loan to add a second bathroom or redesign the 50′s style kitchen can have a great return on investment come resale time.

  11. anatak says:

    @aikoto: Right. Put your house at risk to pay off the credit cards? Not a plan. Credit card companies can sue me, but they aren’t taking my house.

    The point is, can you save some money by moving debt from high interest credit cards to a lower interest credit card / HELOC / CONsolidation loan? Yes. Have you changed / improved / solved your financial mess by doing so? No. You can do these these things, and you can save some interest, but just be honest about what you’ve done. All your debt is still there, you’ve just moved it around. All too often, the cards get payed off by a HELOC and 6 monthes later the cards get run up again. Paying off your debts is not just numbers, its about changing your habits. And that doesn’t happen just by moving your debt to a different debt.

  12. wezelboy says:

    As far as debt consolidation is concerned, some balance transfer options are pretty competitive with a HELOC. I’m getting offers of 4.99% fixed right now. Even with the transfer fee, it is still pretty attractive.

  13. meadandale says:

    Pay off your credit cards with the Home ATM?

    Never a good idea.

    My sister told me how she had used her HELOC to buy her new car so she wouldn’t have a car payment. Wow, great idea, now she’ll only be making payments on that car for 30 years rather than 5.

  14. satoru says:

    Personally I don’t see the benefit of going with a home equity loan. If the amount is small then you’re better off kiting the credit cards onto lower interest ones. If you’re wading waist deep in shit creek, then a home equity is probably the worst thing to do, because chances are you’ll just waste the equity loan as previous history would indicate.

  15. Pasketti says:

    It depends on your situation.

    We refinanced the house a couple years ago to take advantage of lower interest rates. We knocked two full percentage points off the loan. At the same time, we consolidated ALL of our debt (car payments and credit cards) into the same loan.

    Our payments were cut literally IN HALF. Since then, we haven’t carried a balance on the credit cards, and have been paying extra on the loan every month. We should have it paid off (house and everything) in 4 or 5 more years.

    So while I can understand the general principle of “don’t use home equity to pay off consumer debt”, it worked for us by freeing up extra money every month that was going to higher-interest loans. As others have pointed out, the real trick is to not run up more debt while you’re doing it.

  16. mac-phisto says:

    @anatak: assuming the card companies secure a judgment, they could place a lien on your home (@ least where i live). it’s not the same as taking it away from you, but in essence, they’ll still get their money (next time you refinance or if you sell).

    as others have already stated, YMMV. a home equity works for some, but for others it just resets the cycle. until the pattern of racking up charge cards is broken, it’s not a good idea to take on more debt – whether that be a home equity, a consolidation loan, or even another credit card. find another way – sell shit you don’t use anymore, get a 2nd job (or a better 1st job). most importantly, retrain your spending habits.

  17. LostDog says:

    All you’re doing is transferring debt from one spot to another. You’re not “paying off” anything when you get a HELOC.

    In a huge majority of cases once the “old” debt has been transfered it’s built right back up and the person is in even a worse predicament with twice the debt.

  18. rhombopteryx says:

    @anatak:

    “credit card companies can sue me but they can’t take my house”

    …unless you don’t pay them. Credit card companies (like most any other creditor) can usually take legal steps to recover unpaid debts that ultimately include seizing assets, garnishing wages, and foreclosing on property you own. Sure there’s intervening steps and court orders and bankruptcy issues, but at the end of the day, not much is off-limits if you don’t pay. (Which makes your changing habits point all the more important.)