If my boss knew I was writing this, I would be fired. But I’m going to give my humble opinion anyways: when it comes to the pros and cons of paying off credit card debt with a home equity loan there are no pros! First let me say that I’ve been in the industry for a little over two years. I make a living, and a pretty good one at that, as an underwriter for one of the consistent top lending institutions in the United States. All of this makes me anything but an expert, rather I’m looking at the issue from a variety of sides and saying that as an insider do what you have to do to avoid changing your credit cards into a lien on your property.
Credit card debt is unsecured, whereas a home equity loan is secured debt. This means that if you don’t pay back what you owe the credit card companies they cannot come after your property and force you to sell. If something goes wrong and you default on your home equity loan, the Banks can and will come after your house and force you to foreclose. Perhaps people believe that such a drastic outcome won’t happen to them, but today foreclosures have been occurring more and more, and faster as well as the Banks will not give you very many opportunities to catch up on a late mortgage. It’s in the news everyday and foreclosure is a very real and very scary thing.
Furthermore, one extremely disturbing factor for homeowners that I see at my job every day is that the value of our homes, regardless of home improvements, is decreasing and even plummeting in many communities across the nation. Sure the market fluctuates and your property values may increase within time, maybe even a short time. However, when turning credit card debt into a home equity loan one must take into consideration depending on their credit card balances that you may end up with negative equity in your home, which you hadn’t planned on. This is unnecessary if you keep the debt where it is- unsecured with the credit card companies.
There are other reasons people decide to open home equity loans. Perhaps all of a sudden they need a new roof on their house. Perhaps an expensive medical procedure is required and the insurance company is refusing to pay for it. Perhaps an elderly parent needs to move in rather than go to a nursing home and an addition needs to be built onto the property. I could keep the list going forever because unfortunately life loves to hand us down unplanned and even sometimes tragic events that we have to pick up the pieces and find some quick, hard cash for. However, if you’ve already used your equity on paying off your credit cards, you may find that you now need to put the credit card debt back on to pay for life’s little and big surprises.
The popular pro that many people believe about home equity loans is the lower interest rate which means a lower monthly payment compared to our credit cards. This is not always true and unfortunately not that many people know this. You can bargain your interest rate with the credit card companies! Oh yes you can! First of all, most of us get credit card offers on an almost daily basis and many of these offer zero or low interest rates, even for a short period of time. You’ll never find a zero interest rate on a home equity loan. The credit card companies are competing with each other for your business, you can even go online to search for low interest cards for people with bad credit. More than likely you can transfer your high interest cards to ones with lower rates, and more times than you think the rates will be lower than on a home equity loan for that matter.
Secondly, you can call up your credit card company and speak to a customer care representative (and if this person isn’t helping ask to speak to a manager) and as long as your credit score isn’t completely in the toilet you can ask for a lower rate. Especially if you’ve been with the company for at least two years, more than likely they will drop it at least two percentage points. You can tell them you have an offer from a competitor to do a balance transfer but you would really like to stay with their company and you’ll be amazed at the results. For example, when I was twenty years old and had barely any credit built up and what I did was mostly bad credit, I called up my credit card company Capital One where my interest rate was 19% and told them I wanted to close my card and that I was moving the balance over to MBNA and the customer care representative told me he would lower my interest rate to 9%. That’s a huge difference! On the flip side bargaining for home equity loan rates will get you nowhere fast.
Every person’s situation is different and sometimes a home equity loan may just make the most reasonable sense to you in your given situation. But whenever possible unsecured debt should be kept that way so to protect the roof over you and your family. I just hope my boss never reads this and realizes who wrote it!