Using your home to pay off your credit cards?
Home equity loans are great. They offer some of the lowest interest rates around, and they are easy for homeowners to get. So, when you look at your monthly credit card statement, that home equity line of credit starts to look pretty attractive. Right? You could borrow against your home, pay off your credit cards and save a fortune. But, this approach can be pretty risky, so put some thought into it before rushing to borrow against your home.The biggest concern in borrowing against your home is the collateral. When you mis a credit card payment, you have little at risk aside from your credit rating. Credit cards are unsecured debt; you don’t put up any collateral. Home equity loans, on the other hand, are collateralized – with your home. If you default on a home equity loan, you could wind up putting your home at risk. Credit card debt may be more expensive, but in a sense, they also can be safer.
The next problem that many face involves the credit cards. After they pay off their credit card debt with a home equity loan, they start to use the credit cards again. What happens? Well, the borrower has to make payments on the home equity loan. But, he also has all this new credit card debt. In extreme cases, he could wind up with more debt than when he started.
If you plan to use a home equity loan to pay off your credit card debt, cancel the credit cards. This is the only safe way to use this strategy (though it is not completely safe, because you are still using your home as collateral). You need to be able to resist the temptation to use those credit cards again, and sometimes the only way to resist temptation is to remove it completely. Don’t just cut up your credit cards. Call the company, and cancel them. The customer service reps on the phone will do everything they can to keep you as a customer, including offering to increase your credit limit, lower your interest rate (probably only temporarily) and extend cash advances. Be strong. Do not accept these inducements.
If you are using a home equity loan to pay off your credit cards, be careful. Above all else, don’t use your credit cards any more!
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