Considering Using Your Home Equity to Pay Off Credit Card Debt?

Posted on December 27 2006

We have seen a great increase in the number of clients we work with that are at their wits end trying to figure out how they are going to keep from loosing their home as well as keep their other creditors happy. This is due to the recent enticing marketing approaches you’ve see in your newspapers and televisions. If you’ve also been reading and watching those same programs you have seen that foreclosure are on the rise and are also becoming a great economic concern.

Most people that borrow against their home to pay off their credit card debt have wonderful intentions of living a debt free lifestyle. This is a great dream however many people forget that they still need to make lifestyle changes in order to prevent the same mistakes from happening again. We are seeing that the people that need to use their home equity to pay off their credit cards are the same ones that are doing it again and again and eventually there is no more – then disaster strikes.

There are many conflicting views regarding if it is wise to borrow against your home to pay off your high interest credit card debt. I want to break down the pros and cons of using your home equity to pay down your high interest credit cards.

Pros:

• Lower interest rate than you may typically pay on a credit card.
• In most cases the interest is tax-deductible.
• Your monthly payment may be reduced.
• Considered “Debt Free”

Cons:

• Turning your unsecured debt to secured debt. If something unforeseeable were to happen you would not have the opportunity to file bankruptcy on the debt and therefore have your house foreclosed upon.
• If you don’t change spending habits you will see yourself back in the same position with no equity to borrow from. At that time you may end up loosing your home and being forced into filing bankruptcy.
• End up owing more on your home than it is worth without the option of selling.

I truly believe in saving your home as a wonderful retirement tool or as an absolute emergency fund. Can we count on Social Security for our retirement? Will Social Security pay for our mortgage(s) and living expenses when it is time to retire? Are you saving for retirement while paying off your debt and mortgages?

In my opinion our homeownership goal should be to reach retirement with our home paid in full.

-Joe Larson FLCS Certified Credit Counselor