You could save money by using a home equity loan to pay off a credit card balance.
- With a home equity loan, you borrow against the equity you’ve built in your property.
- While you might save money by paying off credit card debt with a home equity loan, there’s a risk involved you’ll need to know about.
If you’re sitting on credit card debt, you may be eager to pay it off as quickly as possible. The longer you carry a credit card balance, the more interest you’re apt to accrue. And that interest could get expensive.
In fact, if you own a home and have a lot of equity in it, you may be thinking of taking out a home equity loan and using it to pay off your credit card balance. But is that a smart move?
How do home equity loans work?
Home equity refers to the portion of your home you own outright. It’s calculated by taking the market value of your home and subtracting your mortgage balance.
If you have equity in your home, you can generally take out a loan against it, and that loan will be secured by your home itself. So, let’s say your home is worth $300,000 and you owe $200,000 on your mortgage. That leaves you with $100,000 of equity.
If you owe $10,000 on your credit cards, you might easily qualify for a $10,000 home equity loan based on the equity you have. In that case, you’d use your loan proceeds to pay off your credit cards and then pay off your home equity loan in equal monthly installments.
The upside of paying off credit cards with a home equity loan
The interest you’ll be charged on a home equity loan will generally be much lower than the interest rate you’re paying on your credit card balances. That’s why using a home equity loan to pay off credit card debt makes sense. If your credit cards are charging you an average of 15% interest but you qualify for a home equity loan at 7% interest, that’s a big difference.
Also, credit card interest can be variable and your rate can rise over time. Home equity loans commonly come with fixed interest rates. That not only makes your monthly payments predictable, but helps ensure your loan doesn’t end up costing more than necessary.