Using Home Equity Lines To Pay Off Debts: Pros and Cons


Laura S. Rossinow, Broker/ Agent, Keller Williams Realty, Newton Highlands, MA

Should you use a home equity line or loan to pay off your outstanding credit card bills or other debt? Maybe. But before you borrow, consider the pros and cons.

There are two kinds of home equity mortgages. With a home equity loan you get a set amount all at once. With a home equity line, you get access to a line of credit that you can spend as you need it.

Loans and lines are secured by the equity in your home (that’s the difference between what you owe on your first mortgage and what your home is worth). If you fail to make your monthly payments, your lender can foreclose on your home.

Many homeowners will take out a HELOC (home equity line of credit) to finance home improvements, to purchase a vehicle or to pay off debts.

Because the interest you pay on a home equity loan may be tax deductible, a home equity line can be a relatively inexpensive way to borrow money.

Suppose you have a $10,000 debt. You’re offered a HELOC for $10,000 at 5 percent interest or you can pay the debt with a credit card that charges 12 percent interest.

The advantage to using the HELOC instead of the credit card is clear. You pay less for the HELOC because the interest rate is 7 percent lower.

But, like any loan, it’s important to remember that a home equity loan is just that – a loan, or debt guaranteed by your home. Your lender will likely let you stretch out repayment over 10 years or more and you’ll be paying interest that whole time.

If one of your major problems is that you spend beyond your means, a HELOC may help you overspend. As a result, a home equity loan may actually make your fundamental problem worse, rather than better.

But, if you have made a commitment to control your debt and are seeking ways to reduce your overall expenses, a home equity loan can be a sensible solution.

One essential exercise is to actually calculate how much money you would be spending per month – and over the life of the debt – in one scenario versus the other. There are debt calculators readily available online to help you do just that.

If you decide to do a HELOC or to refinance your mortgage, email me (or click Article Feedback below) and I’ll give you a referral to a loan officer.