If you've fallen behind on household bills recently and have taken on credit card debt in an effort to stay afloat, you may be searching for options to help pay down your high-interest credit card debt to provide you with a bit more breathing room in your budget. For those who already have a bit of equity in their current homes, seeking out a home equity loan or line of credit may seem like a viable option. However, there are some risks to this approach that should be thoroughly considered before you proceed. Read on to learn more about taking out a home equity line of credit (HELOC) or home equity loan (HEL), as well as some of the factors you'll want to consider when deciding whether this is the right choice for your financial situation.
What does a HEL or HELOC do?
These types of loans were once commonly referred to as a "second mortgage." A HEL is a loan of a flat amount, conditioned on the equity in your home; you'll make regular payments on this loan until the end of the term, at which time it will either be paid off or rolled into your primary mortgage. A HELOC is a line of credit, more comparable to a credit card, which allows you to take regular draws on this line of credit until it is renewed or rolled over into your mortgage. With a HELOC, you'll be required to make minimum monthly payments only when the line of credit carries a balance.
Is using HEL or HELOC funds to pay off credit cards a good idea?
Using HELOC funds to pay off unsecured credit card debt can also leave some benefits on the table. For example, you'd be able to deduct from your federal income taxes any interest paid on home equity or HELOC funds used to improve your home; however, if these funds are used for a non-housing related purpose, the interest is non-deductible.
In addition, defaulting on a HELOC is essentially the same as defaulting on your underlying mortgage. If you find yourself unable to make your minimum HELOC payments (or pay off the line of credit in a balloon payment at the end of the term), you may wind up facing foreclosure proceedings. For this reason, it's crucial to ensure you'll be able to make the number and amount of payments required by your HELOC terms before signing on the solid line.
Because of these potential downsides, you may want to investigate other lending choices--or perhaps even restructuring your credit card debt through a Chapter 13 bankruptcy (or discharging it in a Chapter 7 bankruptcy) in lieu of using HELOC or HEL funds unless you're truly out of options when it comes to tackling your household debt. On the other hand, HELOC funds used to make home improvements or ready your home for sale can often be a wise investment.