heloc to pay credit card debt
Home Equity Line of Credit (HELOC) A HELOC amounts to an open checkbook for people with equity in their home. However, there is a huge risk – foreclosing on your house – if you can’t repay the loan when it comes due.
Owning a home has many advantages. You have an asset which typically increases in value and offers the ability to tap into your equity. When faced with high levels of credit card debt, this option may provide ongoing relief from the overwhelming debt payments and high interest rates.
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home equity loans and Home Equity Lines of Credit, sometimes called a HELOC, are a type of loan many individuals use to consolidate their high interest credit card debt. This type of loan may make sense for individuals that still have a relatively high credit score and documentable income to support the amount of the loan they are applying for.
Ideally, you want to get a line of credit to pay off credit card debt that has two things: a limit greater than the total amount of credit card debt you owe. So if you have 4 credit cards with balances of $2500, $3400, $600, and $7000, you’ll need a line of credit with a limit of at least $13,500 to consolidate your debt.
The apparent advantage of using a HELOC to pay off credit card debt is that you can consolidate at a lower interest rate, even if you have poor credit. Another reason why a HELOC is appealing is that, like your mortgage payments, the interest you pay is tax deductible.
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A home equity line of credit is similar to a credit card in that you have a revolving line of credit that you can use, pay off, and use again. The difference is that most credit cards don’t require collateral, while a HELOC uses your home as collateral.
Shifting credit card debt to a HELOC can dramatically reduce the interest rate on your debt. For example, the average APR on a HELOC nationwide is less than 6 percent, compared with an average APR.
Take note of the interest rate of each debt; some student loans, for instance have a lower interest rate than home equity loans can offer, so you might opt not to use a home equity loan to pay off.
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