The Disadvantages of Using a Home Equity Loan to Pay Off Credit Cards

Because banks and loan companies have been heavily advertising the advantages of home equity loans and home equity lines of credit, more and more people are choosing to take out these types of loans. One of the main reasons that people take a home equity loan is to pay off their existing credit cards and lower their monthly payments.

A loan against your home almost always has a lower interest rate than a credit card. Additionally, the interest from a home equity loan is often tax deductible, whereas the interest from credit card debt is not. That means that typically you can decrease your monthly debt payments - sometimes by hundreds of dollars - by taking out a home equity loan.

While on the surface taking a home equity loan to pay off your credit cards may sound like a great idea, there are some things that you really need to consider before you take out a loan against your home.

Credit card debt is unsecured debt. That means that none of your assets used to secure the debt. If you default on your credit card payments, a credit card company cannot foreclose on your house. Typically credit card companies will turn the debt over to a collection agency which can damage your credit, but they cannot take away your home.

On the other hand, a home equity loan is secured by your house. If you default on your payments to your home equity loan your bank can foreclose, meaning that you very well could lose your home. Not only that, but your credit takes a hit which makes it harder to try to refinance or take an additional loan to save your home.

Another simple fact that many people overlook is that you cannot borrow your way out of debt. If you take a home equity loan to pay off your credit cards you are still going to owe the same amount of money as you did before you paid off your cards. The only difference is that rather than owing the credit card companies you now will owe a bank that has interest in your house.