Credit card debt starts inconspicuously enough — eating out every now and then, an occasional shopping indulgence, a quick weekend getaway for the family. Before we know it, we’ve suddenly gotten to the point where we wished that that (maxed out) credit card debt hanging over our heads was simply a nightmare we could wake up from.
Sadly though, this isn’t going to happen anytime soon. Credit card debt should be handled as one would a bull – take it by its horns. You may be determined to be debt-free as soon as you can manage, but the reality is, it would take more than paying the minimum balance every month to fully settle your obligations.
If you are a homeowner with some equity accrued on your property, taking out a fixed-rate, fixed-amount home equity loan to pay off consolidated credit card debt is perhaps one of the best courses of action you can take to be free of your credit card troubles. Keep in mind though, that taking out a home equity loan doesn’t remove a single dollar from your debt, it simply moves it to a cheaper and more manageable form of credit. But is moving from an unsecured debt to one that’s collateralized by your own home a wise move?
Advantages of a home equity loan
Making the shift into a home equity loan has several advantages:
Lump sum payment. A home equity loan gives the homeowner a large amount of cash outright that hopefully, should be enough to fully settle the average card user’s outstanding balance. Of course, one would now be faced with the responsibility of paying the home loan, but that can be spread out over 5 to 20 years with a fixed monthly amortization.
Lower and fixed interest rates. With credit card companies raising interest rates to double digit figures, the home equity loan has become the more attractive option with lower interest rates that remain the same for the duration of the loan’s term; no unpleasant surprises on your next bill.
Convenience of a single monthly payment. Many card users have compounded their troubles further by juggling different credit cards with different due dates. By consolidating all your credit card debt into a home equity loan, you now only have to take care of a single payment every month.
Tax-deductible interest payments. As with most home loans, the interest paid is tax-deductible so you get to save more than just the reduced interest rates.
Risks of switching to home equity
A home equity loan is not without its disadvantages. One potential disadvantage of making the switch from credit card debt to home equity loan is the fact that it frees up your credit card line again. Unless you get rid of the plastic altogether, or radically change your spending habits and mindset, the opportunity and temptation to use the card again is still there. If you used up all your home equity the first time, you might not have such an easy way out of credit card debt the second time around.
And then of course, there’s that obvious risk of losing one’s home should you end up defaulting on your home equity loan. Suddenly, filing for bankruptcy doesn’t sound like such a negative proposition, does it? However, do remember that thousands of other Americans have been in the same boat, taken the home-equity-loan-to-pay-debt route, and have successfully managed to become debt-free.
Take control of your finances by putting an end to your downward spiral into more debt. By taking the home equity loan option, you could give yourself a fresh start.