Sometimes it is smart to use a home equity line of credit, otherwise known as a HELOC, to pay off a credit card, and sometimes it is not. If you have equity built up in your home, taking out a HELOC is certainly an option to pay off credit card debt, but first consider the pros and cons.
Identification
A HELOC works like a credit card, only you use your home as collateral. Homeowners typically qualify for 75 percent of the home's appraised value minus the balance you owe. So, for example, if your home is valued at $300,000, 75 percent of that is $225,000. Say you still owe $150,000 on the house. Your potential line of credit would be $75,000.
Considerations
If home equity debt is cheaper than credit card debt (the interest rate is lower), it may make sense to take out a HELOC and pay off your credit cards. Plus, you get a tax deduction for interest you pay on a HELOC. However, if you can get a lower rate on a credit card than you would on a HELOC, you should not take out an equity line and simply pay your credit card.
Warning
It's always riskier to have a loan out on your house than it is to carry credit card debt. If you are delinquent on your HELOC, you can lose your home. If you are delinquent on your credit card, your credit issuer can sue you, but you will almost never lose your home from being delinquent on a credit card, according to SmartMoney.
Expert Insight
Another danger concerning using your HELOC to pay off your credit card is that it may be tempting to run up your card again once it is paid off. You must be disciplined and curb your spending. Otherwise, you could wind up with the same credit card debt as well as a HELOC. The Motley Fool recommends that before you start using your credit cards again, you first pay off your HELOC.
Features
You also must consider the cost to take out a HELOC. You pay fees similar to when you bought the house, such as property appraisal fee, an application fee, one or more points -- which are 1 percent of your credit limit -- and closing costs. You could pay several hundred dollars just to take out the line, according to The Federal Reserve Board.
Bottom Line
The bottom line regarding whether you should or shouldn't take out a HELOC to pay off your credit cards depends on your particular situation. If you can handle the credit card payments without tapping the equity in your home, do that first. However, if you have outstanding credit card debt that you can't seem to pay down, and you are paying a high rate of interest on the cards, a HELOC may be the answer to get you back on track, according to Bankrate.com.
0 comments:
Post a Comment