How to Use a Home Equity Loan to Pay Off Debt

Using a home equity loan to pay off debt is risky because you are trading unsecured debt (credit cards) for secured debt. If you stop making payments on your credit cards, you won't lose your house. But if you stop making payments on your home equity loan, you could lose your home.

Instructions

Difficulty: Moderately Easy

Things You’ll Need:

• Guide To Personal Finance
• Investment Advice
• Calculators
• Financial Manager
• Investment Software
• Personal Financial Software

1. Consider this option if you have heavy debt and plenty of equity in your home.
2. Contact your bank or mortgage company to determine how much equity-line credit it will give and at what interest rate.
3. Determine what monthly payments will be.
4. Fill out necessary paperwork if you choose to go in this direction.
5. Pay off other creditors with a line of credit from your home equity.
6. Begin making one monthly payment to your home equity loan instead of writing several checks a month to different creditors.

Tips & Warnings

• Your monthly payment will be substantially lower with a home equity loan because you will be paying the loan a lot longer - for as long as 30 years.
• Avoid using a home equity loan to pay off debt if your equity is slim. Many banks won't allow you to touch the principal in the house unless you have at least 20 percent available to you.
• Consult with a tax professional or a financial advisor before making this decision.