Mortgage Manager: When to Use Home Equity to Pay Off Credit Card Debt

By Richard Barrington Columnist

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Using a home equity loan to pay down credit card debt can make sense--if you do it under the right circumstances.


First Prove You Can Handle It

The ultimate risk is that you find you can't make the home equity loan payments, and face foreclosure of the mortgage. What adds to this risk is the fact that once the home equity loan zeroes out your credit card debt, you might be tempted to build that debt back up again.

Before you take out a home equity loan, try this simple test for a few months.

Figure out what your monthly payment would be if you refinanced your debt at current home equity mortgage rates. Then, for a few months see if you can pay down credit card debt in an amount equal to that projected monthly payment plus any new credit card borrowing during the month. If you meet that test, and can commit to sticking to this discipline, then you've reached a stage where a home equity loan can help.

Potential Savings from Lower Mortgage Rates

The payoff at this point is the differential between credit card rates and mortgage rates. Home equity loan rates are generally a little higher than original mortgage rates, but lower than most credit card rates. The average family has $9,200 in credit card debt. Every 1% interest differential between a mortgage and credit card debt would mean about $92 per year in savings on this amount.

With total revolving debt in the U.S. totaling $880 billion, that would mean $8.8 billion in annual savings for every 1% reduction in interest rates. While a mortgage solution wouldn't be available to every borrower, these figures do indicate that there are an awful lot of dollars out there waiting to be saved.

About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.

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