Home Equity Loan or Balance Transfer Credit Card?

By Barbara Marquand
Mortgage Credit Problems Columnist

You're struggling to make monthly payments on several credit card balances, and you've got a good chunk of equity in your home. Should you get a home equity loan to pay off your credit card debt, or transfer high-interest balances to a low-interest balance-transfer credit card and work extra hard to pay it off?

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Here are five key considerations to keep in mind as you weigh your options:

  • Home Equity Loan Foreclosure Risk
  • Credit card debt is unsecured, which means you've put up no collateral in case you default. But if you can't pay your home equity loan, you risk losing your house. Make sure you can make the home equity loan payments before you sign.

  • Interest Rates on Loans for People with Bad Credit
  • Balance-transfer credit cards offer introductory rates as low as zero percent interest, but the low rate doesn't last forever. Read the fine print to learn when the rate will go up and how high it will go. Also, if you have bad credit, you may not qualify for the lowest advertised rates on credit cards. Issuers charge higher rates to people with low credit scores. Chances are a home equity loan will offer a lower rate over the long haul than a credit card.

  • Cost Over Time
  • The best way to pay off debt is as quickly as you can. The longer you carry debt, the more you'll pay in interest over time. Because a home equity loan amortizes debt over a long period--typically 10 to 15 years--it may end up costing you more in the long run than it would to keep and pay down the credit cards. You can always make higher payments on your home equity loan, however, and accelerate its payoff.

  • Home Equity Loan's Potential Tax Savings
  • In some cases you can deduct home equity loan interest on your income taxes, but check with your tax advisor first.

  • Debt Consolidation: Don't Overlook Fees
  • Home equity loan fees, which can include costs for appraisal, application, title search, attorney or title agent, and document preparation, can cost as much as 2% to 5% of the amount you borrow. But don't overlook fees associated with credit cards, including the annual fee and the fee for transferring balances, which can equal 3% or more of the balance. And some home equity lenders are willing to absorb some or all of the costs in exchange for charging a higher interest rate.

For Real Debt Relief, Change Habits

Regardless of how you decide to consolidate debt, review your finances to correct the habits that got you into money trouble in the first place, and set a spending plan to prevent running up more credit card debt.

If you decide to go with a home equity loan, shop among lenders. Enter your information on the form on this page to get up to four free quotes from lenders offering their best home equity loan rates.


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