Should I Use My Home Equity To Pay off My Debt?

By Karen Lawson
Mortgage Credit Problems Columnist

Fitch ratings, which issues a monthly report on the credit card industry, states that credit card defaults of 60 days or more have increased 24% from August 2008 to December 2008. If you're troubled with credit card debt, now may be the time to apply for a home equity line of credit (HELOC) for consolidating your debt. Here are some points to consider when deciding if a HELOC can help you resolve credit card debt and possibly improve bad credit:

Changing home values affects your home equity: Home equity is the difference between what your home is currently worth and the amount of mortgage loans against it. If your home is worth $250,000, and your mortgage balance is about $150,000, you have approximately $100,000 in home equity. Unfortunately, if your home loses value, your home equity will also be reduced. When home values are falling, homeowners who have borrowed against most or all of their home equity risk owing more than their homes are worth. This can lead to foreclosure if you are unable to make payments, but cannot sell your home for enough to repay your mortgage. If you don't have sufficient home equity to consolidate credit card debt, consider contacting a non-profit credit counseling agency for help.

Potential benefits of consolidating debt with a home equity loan: If you're having problems paying credit card bills, or have too many bills, consolidating with a HELOC can roll many payments into one, and may offer income tax benefits (this does not apply in all cases; consult your tax advisor for more information). Consolidating can help improve your credit by eliminating balances from several credit accounts; your credit report will show your HELOC with the amount you've consolidated. Although it may be possible to save money by using a HELOC for consolidation, savings may be lost if you repay your HELOC over a long period of time. The longer the repayment terms, the higher your finance charges(APR) will be. Paying the most you can afford each month will help maximize the benefits of consolidating debt with a HELOC.

Avoid Going Back into Credit Card Debt: A bad credit HELOC is a useful tool for rebuilding your credit, but once you've consolidated all of your credit card debt and cleared the balances from your cards, it can be tempting to celebrate by going shopping! If you do this, you risk losing the benefits of your HELOC loan, and could end up owing a HELOC and new credit card balances, too. If you have problems with overspending, contact a credit counseling agency for help with managing credit card debt. Bad credit home equity loans may not be a good choice if you're tempted to keep spending!

About the Author
Karen Lawson is a freelance writer with more than fifteen years of experience in mortgage banking. She holds an MA degree in English from the University of Nevada, Reno.

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