Dealing with credit card debt can be seriously stressful. If you’re struggling to get your balance under control, you may have considered consolidating your cards into one low-interest loan. Homeowners might wonder whether it’s a good idea to tap their home equity to pay down other types of debt, especially high-interest credit card balances.
One consolidation option available to homeowners is a home equity line of credit. But what is a HELOC, and is it smart to use one to deal with your credit card debt? Take a look at the details below to decide if this option is right for you.
How a HELOC works
A home equity line of credit, or HELOC, is a line of credit you take out from a lender. The amount of your credit line depends on how much equity you’ve built up in your home. Like a credit card, a HELOC is revolving debt. This means you can borrow against it, pay it off, then borrow again – just like you would with a credit card. You don’t borrow from it and repay it in installments until it’s paid off, as you would with a home equity loan.
Advantages to using a HELOC to consolidate debt
HELOCs are often touted as a great vehicle for consolidating high-interest debt. This is because they have some advantages, including:
- Lower interest – Because HELOCs are secured by your home, their interest rates are significantly lower than credit cards. This is because you’re borrowing against the equity in your home to obtain the line of credit. Additionally, rates on home loan products (including HELOCs) have been at historic lows since the Great Recession. This means that if you roll several cards onto one HELOC, you could save serious money on interest payments.
- Tax deductible – HELOCs require you to borrow against the equity in your home. Like mortgages, the interest you pay on them might be tax-deductible if it is used on something that improves the home its borrowed against. Check with your tax advisor first but this could add up to savings when tax time rolls around.
If you have significant debt, say, on a credit card with a 15% interest rate, a HELOC might seem like an easy solution. You could potentially save on interest costs and lower your monthly payments.
Risks to consider
For some homeowners, consolidating credit card debt with a low-interest HELOC makes sense, but it’s important to find out how much it will cost to obtain a HELOC from your lender. It might be more than taking out a personal loan, for instance. Most HELOCs have variable rates, so your monthly payments could go up or down periodically. Ask your lender how often the rate can be adjusted, and by how much. Some financial institutions offer fixed-rate HELOCs, but they might have higher initial interest rates than adjustable-rate credit lines. Member Services has your best interests in mind, so you may want to ask them what your best options are.
Using a HELOC to consolidate your high interest credit card debt can be a smart move if you borrow carefully and repay the loan quickly. Just be sure you fully understand all the costs and risks and have a stable plan for keeping up with your repayments. If you have enough equity in your home and are looking for a lower-interest loan to pay off your credit cards or pay for college tuition, a home equity loan for debt consolidation could be the right choice for you. Contact Member Services to discover your options today!