In an Experian study from 2020, they found that the average American is about $92,700 in consumer debt. Consumer debt involves credit cards, auto and personal loans, student loans, and mortgages. If you have a large amount of debt looming over you and you own a home, you’ve probably thought about pulling out equity to pay some (or all) of it off. In some cases, this can be a great idea, but sometimes it may be a better option to continue your path of slowly paying everything down. Before you decide, here are some benefits and consideration of using home equity when paying off other debts:
Because interest rates on a home equity loan, commonly known as a HELOC, are generally lower than credit cards, more of your payment will go toward the principal of the loan. This is especially appealing if you have several thousands of dollars owed with the 18-21 percent interest rate common to credit cards. A lower interest rate should allow you to pay off the debts more quickly and takes up less money over the life of the loan.
Another benefit of a HELOC to pay off credit card debts is that often times the interest paid on the HELOC is tax deductible. Credit card interest is not tax deductible. This option varies a bit, and you’ll want to discuss the details with one of our professional lenders.
When taking out a HELOC to pay off other debts, your house is the collateral. If you can’t afford to pay the new loan, you risk foreclosure. Ensure you can handle the payments before getting into a monthly commitment that overloads you. Even if you save money over the course of many years, if you can’t afford the monthly payment, this isn’t a benefit. Additionally, if your home value drops, there’s a chance you could end up owing more than it’s worth, so you probably don’t want to max out this option. Keep in mind that the payment on a HELOC is likely going to be a minimum of ten years, keeping you tied to that payment for quite a while.
If you’re teetering on bankruptcy, know that credit card debt is more easily discharged in bankruptcy than a home loan. Even though bankruptcy wipes away much of your debt, there are huge repercussions such as damaged credit for several years. Bankruptcy may be the only option for some cases, but if you’re feeling trapped and struggling, come meet with our team and consider your options before going that route.
Another consideration is accepting the truth of your spending habits. Too often we see people consolidate their debt and get back on track just to take out more credit cards later, getting into an even bigger mess than before but with no safety net available. If you get a HELOC for debt consolidation, you must be honest with your spending habits and address it wisely to ensure you stay on the right track.