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Should You Use A HELOC (Home Equity Line Of Credit) To Pay Off Credit Cards

Performance Property Real Estate Question

Q: Do you think we should use our home equity line of credit to pay off our credit card debt? Susan, West Orange, NJ

A: Although it can reduce interest payments, using a Home Equity Line of Credit (HELOC) to pay off credit card debt is a high-risk financial decision. If you use a HELOC to pay off credit card debt you are NOT reducing your debt, you are swapping one form of debt for another form of debt. Since a HELOC is secured by your home, defaulting on payments puts your house at risk of foreclosure, a consequence that does not exist with defaulting on unsecured credit card debt.

If you have a stable income, a proven ability to manage debt, and have committed to avoid accumulating new debt, using a HELOC to pay off credit card debt may make sense. However, for people with unstable finances or a tendency to overspend, the risk of losing your home may not be worth the benefits of getting a HELOC.

HELOCs often have much lower interest rates than credit cards. In recent years, HELOC rates have been around 8% while credit card APRs often exceed 20%. The combination of a lower interest rate and a longer repayment term can significantly reduce your total monthly debt payments, which frees up cash to invest in something else.

The most significant risk with a home equity line of credit is that a HELOC is secured by your home. If you cannot make the payments on your HELOC, the lender can foreclose on your home. Most HELOCs have variable interest rates, which can fluctuate based on market conditions. If rates rise, your monthly payments can increase. A HELOC comes with closing costs, which can range from 2% to 5% of your credit line and you may also be charged annual maintenance fees. For smaller debts, these fees could outweigh the interest savings you’d get by paying down credit cards with a HELOC. Therefore, using a HELOC to pay down credit cards actually increases your overall debt as a result of the closing costs and maintenance fees. For example, paying off $10,000 in credit card debt could result in $10,500 of HELOC debt. With zeroed-out credit cards and a new line of credit available, you may be tempted to start charging again. This could put you in a worse position with both a HELOC and new credit card debt. Also, a HELOC can have a long repayment period, often 15 to 20 years, so even with a lower interest rate, this longer term could result in you paying more total interest over time than if you just aggressively paid off credit card debt. Thanks for your question, Susan.

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