Your phone is getting more text messages, emails and calls from creditors than friends. What’s more, things have progressed to the point where making even the minimum payments on your debts means you’ll have to forego grocery shopping.
In other words, you’re nearing the end of your rope and running out of grip.
As you’re considering your next step, you realize you do have equity in your home. But should you use home equity to pay down debt?
Let’s take a look at the pros and the cons.
Reduced Interest Payments
Unsecured debt like credit cards comes with higher interest payments; while secured debt, such as that associated with home mortgages, carries much lower interest. Refinancing your home to pull the equity and pay off your debt will automatically lower the interest you’ll pay to satisfy those debts. Even better, the interest you willpay is tax deductible because it counts as a second mortgage on your home.
Lower Monthly Payments
Combining all of those outstanding debts into one will generally result in a lower total monthly payment. Plus, you’ll only have one bill to pay each month. This reduces the likelihood of a creditor slipping through the cracks and imposing fees, penalties and increased interest rates as a result.
More Money May be Available
Going with a home equity line of credit, or refinancing your home and pulling the equity, can garner more cash than a regular consolidation loan or transferring your balances onto a low interest credit card. You can typically borrow up to 85 percent of the value of your home — less, of course, the balance due on the mortgage. This can give you a lot more money with which to work, depending upon the amount of equity you have available.
You Could Create Even More Debt
You could wind up digging a deeper hole for yourself. For example, if your debt is the result of a shopping addiction, looking at all of those cards with zero balances is going to trigger an irresistible temptation. If you give in to it, you’ll find yourself right back at the end of your rope. However, this time it will be much shorter and there will be no home equity cushion to break your fall.
You Could Lose Your House
Remember that whole secured vs. unsecured debtsecured vs. unsecured debt thing we mentioned above? Secured debt means you’ll pledge some valuable asset as collateral for the loan. In the case of a mortgage, it’s your interest in the propertsy against which the loan is written.
Meanwhile, unsecured debt is backed only by your promise to pay. Failure to do so will result in collections calls and damage to your credit report. However, you’ll experience everything above, plus the loss of the asset if you do the same thing with a secured debt.
And, if that asset is your home…
The Bottom Line
So, should you use home equity to pay down debt?
It’s certainly a viable option — albeit one with some rather significant caveats. You’ll have to eliminate the catalyst of the debt to prevent its resurgence. You’ll also have to be certain you can repay the loan; otherwise you could lose your home.
A better option might be consulting a company like Freedom Debt Relief to see if there’s a way to work with your creditors without putting your home at risk. These firms can often negotiate reduced repayment terms on your behalf.
Further, there might well be money hiding in your home you’ve been overlooking. Go through your closets, attic, basement and garage to find and sell off possessions you no longer use. There are a number of ways to find money to pay down debt without putting your home at risk — always try those first.