Categories
Make Money From Home

Using a Home Equity Loan for Debt Consolidation Is Not Worth the Risk. Consider These Alternatives – NextAdvisor

Editorial IndependenceWe want to help you make more informed decisions. Some links on this page — clearly marked — may take you to a partner website and may result in us earning a referral commission. For more information, see Ho…….

We want to help you make more informed decisions. Some links on this page — clearly marked — may take you to a partner website and may result in us earning a referral commission. For more information, see How We Make Money.

While high home prices aren’t great news for homebuyers, many existing homeowners are sitting on a goldmine of equity.

By the end of the second half of 2022, the average U.S. homeowner had $216,900 in “tappable equity” while still retaining 20%, according to the latest data provided by mortgage technology and data provider Black Knight. 

Given record-high equity and relatively low rates on HELOCs and home equity loans, it may be tempting to tap into your equity to consolidate and pay down other debts that have higher interest  — such as credit cards. Taking on a home equity loan or HELOC for debt payoff has its advantages, but it also comes with risks. Experts also suggest exploring alternatives before you use your home equity to consolidate debt. 

Pros and Cons of Using Your Home Equity for Debt Consolidation

If you have significant high-interest debt, using your home equity to pay it off will likely result in a lower interest rate. The average rate for a 10-year, $30,000 home equity loan currently sits at 7.05% The average credit card interest rate is 15%, but many times, consumers find themselves with even higher credit card interest rates surpassing 20% or 25%. Reducing the interest rate you pay on your debts will help you pay off balances faster since more of your payments will go towards the principal versus interest. 

Another advantage is to have one monthly payment, which could make it easier to manage your debt, especially if you have multiple loan payments. Home equity loans can come with terms as long as 30 years which could lower monthly payments. 

Despite these advantages, this strategy can be dangerous. While credit card debt is unsecured, meaning it doesn’t require collateral, both home equity loans and HELOCs use your home as collateral. 

Beyond putting your home at risk, you also won’t be able to deduct the interest on your HELOC or home equity loan on your taxes. When you borrow against your home and use the money to make improvements, the interest is generally tax-deductible. But if you use it for another purpose, it isn’t. 

Plus, you might need to pay closing costs when you tap into your home equity, which can amount to 2% to 5% of the loan amount. It may also take between two and six weeks for loan funds to be disbursed to you. 

Pros

Leave a Reply

Your email address will not be published. Required fields are marked *