Using a home equity loan, HELOC, or cash-out refinance to pay off credit cards may sound like a good way to lower your interest rate and combine several payments into one. It can help in some situations, but there are important risks to consider.
Possible Benefits
You may be able to get a lower interest rate than you currently have on your credit cards. Combining several balances into one payment can also make your monthly bills easier to manage.
A fixed home equity loan may also give you a clear monthly payment and payoff date.
Possible Drawbacks
The biggest concern is that you are turning unsecured credit card debt into debt secured by your home. If you cannot make the payments, your home could be at risk.
A lower monthly payment may also mean stretching the debt out for many more years. This could cause you to pay more interest over time.
There may also be closing costs, appraisal fees, and other charges.
HELOC rates can change, which means your payment could increase.
Another risk is paying off the credit cards and then using them again. You could end up with a home loan and new credit card balances.
Consider All Your Options
Using home equity may make sense in certain situations, but it should not be an automatic decision simply because the monthly payment is lower. Compare the total cost, repayment period, fees, and risk.
A nonprofit credit counseling agency can also help you review your budget, debts, and available options. Depending on your situation, a debt management plan may help lower credit card interest rates and combine payments without placing your home at risk.
Consumer Credit of Des Moines offers free and confidential budget and debt counseling.
A certified credit counselor can review your situation and help you determine which option makes the most sense for you.