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If you find yourself saddled with thousands in credit card debt you may be considering turning to your home equity to finally get that debt off your back. For some people this can be a great idea because it turns what may be tens of thousands of dollars of debt at a high interest into an affordable monthly payment at a low, fixed rate. You should realize, however, it has serious potential downsides that need to be considered before you make your decision.
If you’ve stopped using credit cards and accruing debt you may be a good candidate to use your home equity to pay off your credit cards. The reason this is important is simple: you’re putting your house on the line by using your home equity. If you haven’t learned the responsibility to stop adding to your debt you may dig yourself into a deeper and much more painful hole. Using your home equity may also be a good choice for you if you’re currently paying high interest rates on your credit cards. Throwing away hundreds of extra dollars each month to interest doesn’t just hurt, it makes it even harder to get out of debt. A low fixed interest, on the other hand, means you can pay more money directly to the principle you owe.
Now to the potential down sides. Using a home equity loan to pay off your credit cards can be very dangerous because you’re turning unsecured credit card debt into debt that’s secured–by your home. If you need to declare bankruptcy or run into some other trouble your home is acting as collaterol for the debt so it cannot be cleared. This also means that defaulting on the loan could possibly cause you to lose your home. Another consideration: if your home drops in value you may find yourself owing more than it’s worth. Becoming upside down on a mortgage is a dangerous position because, among other problems, it prevents you from selling your home if you need to.
Only you can decide if it’s a good idea for you to use a home equity loan to pay off your credit card debt. If you stand to save a lot of money on interest or your credit card minimum payments are too much to handle you may find relief and help from this option. Just use extreme caution because losing your home is not worth saving some money. A good way to examine your situation is to use a debt calculator to find out how fast you can pay off your credit card debt with your current situation compared to a home equity loan with a low rate.