Should you use home equity to pay off credit card debt?

Credit card debt is insidious. That compounding interest rate sneaks up on you, and before you know it, you have thousands of dollars in consumer debt. For some people, taking out a home equity loan can be a ticket to economic freedom.

You can borrow against the equity in your property by taking a home equity loan or line of credit. It’s important, however, to make sure you weigh the pros and cons to make sure this strategy is right for you.

One of the biggest pluses of a home equity loan is that the interest rate will likely be lower than the rate you pay on credit cards. Plus home equity financing is tax deductible. For many people, these two factors create significant savings.

For some people, however, home equity interest rates may be higher than those for student loans or some vehicles. If you choose to go with a home equity line of credit rather than a loan, you may have an adjustable rate that could increase.

If you have trouble keeping those credit cards in your wallet, you’ll most likely have the same problem with a home equity loan, especially if you choose a line of credit. You could be paying for impulse purchases years later. Most home equity loans have to be repaid in 15 years, and since most have very low minimum payments that are just interest plus a tiny amount of principal, you may come up short when the loan has to be paid off.

Don’t forget that your home equity loan or line of credit is secured by a+ lien on your home. So, unlike with consumer debt, if you can't make the payment and default on your loan, the lender can foreclose on your home.