Can You Get a Home Equity Loan to Pay Off Credit Cards?

If you have balances on many different credit cards, you may want to consolidate the different accounts into a single loan to make it easier to manage your finances. If you own your home, you may have a considerable amount of equity that you may be able to tap into with a home equity loan to pay off credit cards. Be aware that there are benefits and risks to doing this.

Interest Rate Savings

Generally speaking, credit card interest rates are higher than home equity loan rates. Depending on your total credit card balances, you could save significant money by reducing your interest rates just a few points. Interest rates are usually lower on home equity loans than credit cards because the equity in your home secures the loan, meaning less risk for the home equity lender. The interest rate that you will pay on a home equity loan will vary, depending on your credit history and how much equity you have in your home.

Tax Savings

Interest you pay on a home equity loan may be tax deductible. You may deduct the interest that you pay on a home equity loan of up to $100,000 that you use for any purpose, including debt consolidation. If you borrow $50,000 in home equity at 7 percent, you will pay about $3,500 in interest in the first year on the loan. In the 25 percent tax bracket, you will save $875 that year in taxes, or almost $74 per month. Of course, you must itemize your deductions to take advantage of this savings, and your tax situation may vary.

Increased Risk

Consider the increased risk of using a home equity loan to pay off credit cards. If you are unable to pay the home equity loan, the lender could foreclose on your home. If you cannot pay your credit cards, the credit card companies can put you into collections, possibly suing you and garnishing your wages, but they cannot take your house. If you need to declare bankruptcy, credit card debt can be eliminated in a chapter 7 bankruptcy, but you would still need to pay the home equity loan to keep your home.

Borrowing On Credit Cards Again

If you pay off your credit card accounts with a home equity loan, you have multiple credit cards with zero balances. It may be very tempting to charge purchases on those cards again, putting you back where you were before, but with a home equity loan to pay as well. If you don't have the discipline to refrain from credit card use, it might be better to pay the credit cards off without the home equity loan.