Ask Terry Questions Home Equity Loan for paying credit card debt

Home Equity Loan for paying credit card debt

By Terry Savage on December 13, 2018 | Housing / Real Estate

Hi Terry,
My wife & I are in our mid to late 40’s and have accumulated close to $98K in credit card debt over the years and it is finally catching up to us. This was partly due to the fact that we bought a house out in the suburbs in 2016 and then we both lost our jobs a couple of months later. We have both have found new jobs since, but we are making roughly $50K/year less than our previous salaries and have stumbled in our money management. We have no derogatory marks on our credit history and the main item bringing us down is poor credit usage (high balances, little credit available) on the credit cards. I contacted the NFCC and they put to me a local counselor that only offered credit card consolidation. (I don’t think that would work for us).

I’m considering using equity in my house (which is about $36K) and getting a Home Equity Loan to pay down some of that debt. I’m a little confused as to which would be better suited: a HE Loan or a HELOC. I still want to have available credit (for emergency purposes) and have some kind of cash flow as well. Can you help clarify?

Terry Says

Those are just two different names for the same thing — borrowing against the equity in your home.  With a “line of credit” you do not have to take down the money immediately, and do not pay interest until you do.  With an actual home equity LOAN, you’ll start paying interest immediately.

VERY IMPORTANT:  As noted in a nearby Q&A response, if you do not use the loan to “improve the property” but instead use it to consolidate and pay off credit card debt, the interest is no longer deductible!   So unless you get a much lower rate on this loan than on your credit cards, this won’t make much difference, even though the interest may be calculated differently.

Also, read next week’s column on balance transfer cards.  That’s another thing to consider if your credit is ok.  And it gives the formula for getting out from under credit card debt.

Let me ask you to consider another option.  Do you really NEED to live in your suburban house?  Would you be better off selling, (and assuming the gains would be tax-free depending on the amount of profit and your tax filing status), and consider starting over with a fresh slate in a less expensive home, or even renting.  This would get you out from under the burden of debt and give you some breathing room.     Of course , if you have children involved this may have other implications.



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