Pay off your credit cards, lose your house?

One of the things we hear on a recurring basis from our clients, is that someone has suggested that they take out a home equity loan or line of credit to pay down the costly credit card debt that they have mounted.  In many cases this is in fact sound advice, however it is not without its risks.

There are a number of positives associated with this strategy.  First, a home equity loan or line of credit is generally, significantly less expensive than the credit card debt that you are using the money to pay off.  In many instances, the balances on your credit cards are being carried with an interest rate of greater than 20 per-cent, and in many cases now greater than 30%.  This is VERY expensive debt.  In comparison, a typical home equity loan or line of credit in today's market carries an interest rate significantly less than 10%.  This may allow you to pay down the total in a significantly shorter period of time, even if you continue to maintain the same monthly payment.

Another benefit of a home equity loan is the ability to write-off a significant amount of this interest on your taxes.  This in many instances is a huge benefit bringing down the actual cost of the loan even farther.  This write-off is not available for credit card interest.

However, even though the benefits may be significant they are not without risks.  The primary risk is the potential for losing your home.  When you take out a home equity loan or line of credit you are taking out a secured loan.  In essence, in order to secure their loan to you the lending institution will require a legal guarantee from you that if you do not pay them pursuant to the terms that they have the legal right to foreclose on your home and sell it to satisfy your obligation to them.  This is a significant risk and must play an important factor in your decision making.  Do not take this lightly.

So while a home equity loan or line of credit may be a good option to pay down costly credit card debt, it is not without risks.  Make this decision as you would with any other important financial decision, with great care and taking all the pros and cons into consideration.

For more information on home equity loan basics, here is a great breakdown from the Wall Street Journal.

About Anthony Candella

Anthony is the founder and Directing Attorney of and has been helping consumers just like you understand and improve your credit and financial situation since 2003.