A very smart person once told us that you cannot borrow your way out of debt. While that is essentially true, there is a way to borrow money that can help make your debt easier to handle. It’s what’s called a home equity loan and is something you can do if you own your home and have a fair amount of equity in it.
For example, if your home is valued at $300,000 but only have a $200,000 mortgage, you have $100,000 in equity that you can borrow against. There are two advantages to this. First, it’s a way to combine all your credit card payments into one lower payment. Let’s suppose you owe $10,000 in credit card debt at interest rates of 15%, 18% and 20%. You could pay off all this debt with a home equity loan at an interest rate of around 4.5%. This could easily reduce your payments by several hundred dollars a month. Just think how much that could help you and your family.
However there is a big downside that makes a home equity loan a lousy way to pay off debt. What you are doing is taking an unsecured debt and making it secured by using your home as collateral on your home equity loan or home equity line of credit.
This means that if you run into financial problems you could lose your home because of your credit card debt. This does not make a lot of sense when you could have used bankruptcy or debt settlement to pay off your credit card debt instead of losing your home.
While the low interest rate and low monthly payment may be attractive, using a home equity loan to manage your debt problems is not the best choice for debt management.